The world evolves and the pensions industry must follow suit, writes Rowanmoor group compliance manager Mark Lisle.
Having had its charter since 1128, it is amazing to think Bruges had escaped our holiday radar until we saw the film In Bruges last year. We have now been three times in a year, such is the attraction.
Bruges has a rich and prosperous past, which sadly declined in the 16th century as the link to the North Sea some seven miles away started to silt up, and Antwerp stole its trade. Now, tourism is the major industry. Bruges is a natural survivor.
Despite the somewhat ill-conceived disincentives for long-term savings provision, so too is the world of pensions.
With the imminent reduction in the annual and lifetime allowances, there is an opportunity for pension scheme members to maximise their pension contributions.
The lifetime allowance reduces from £1.5m to £1.25m from 6 April next year, with the annual allowance reducing from £50,000 to £40,000. This will affect individuals whose contributions are greater than these figures or employers who contribute on behalf of their employees.
To prevent potential tax charges occurring as a result of the reduction in the lifetime allowance, the government has established fixed protection for those individuals.
However ring-fenced and restricting the reductions may appear to be, these HMRC fortifications do not mean there is no prospect for prospering under what appears to be a limiting factor.
Take an individual (let’s call him Monty), who already has benefits totalling £1.15m from his occupational scheme. Although he does not initially need retirement income beyond this, he would like the flexibility to have additional income available in future.
He plans to sell his company and establish a SIPP to accept contributions prior to the sale. Contributions have been paid to his existing pension for the last four years and benefits have now reached the maximum permitted by the scheme.
Nevertheless, Monty is able to use the carry-forward facility for unused annual allowance from the previous three years, up to the annual allowance of £50,000.
However, benefits to the value of £12,000 have been accrued to his occupational scheme, which means Monty can contribute the difference of £38,000 for each of these three years and £50,000 for the current tax year. These fortifications have already increased Monty’s contribution potential to £164,000.
Monty decides his company will contribute £164,000 into his newly established SIPP. When the contribution is aggregated with his existing pension, Monty’s funds total £1.314m.
As not all benefits are to be taken prior to 6 April, when the lifetime allowance reduces to £1.25m, pension protection will need to be applied to ensure a tax charge is not incurred on excess funds above £1.25m.
Monty can now take control of the SIPP’s investments and the timing of taking benefits.
As he does not intend to make any further contributions and does not have any existing pension protection, Monty opts to apply for fixed protection. This protection will safeguard his fund from a lifetime allowance charge, up to the current lifetime allowance of £1.5m.
Adapt and survive.
Mark Lisle is compliance manager at Rowanmoor Group
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