John Lawson: Act quickly to save client's pension allowance
Advisers must hurry to take advantage of the end of the tax year and there are a number of opportunities for last-minute planning.
It was commonly understood that excess pension payments of above £50,000 in one tax year ate up unused annual allowance from previous years but HM Revenue & Customs has now decided that for the three tax years between 2008/09-2010/11, payments of more than £50,000 do not use up previous years’ allowances.
Many customers, particularly those with an income of less than £130,000, made big payments in 2010/11 when the annual allowance was £255,000. Even some of those with income over this level made large payments because they had been making regular payments before anti-fore-stalling rules came into force.
Until recently we assumed that, in many of these cases, unused allowance from 2008/09 and 2009/10 was used up. That is no longer true and clients may have up to the full £50,000 available to carry over from 2008/09 and 2009/10. But you have to be quick.
To use the 2008/09 allowance, it must be paid into a pension with an input period ending in 2011/12. If a client’s existing pension input period already runs into 2012/13, consider adding a new arrangement ending 2011/12.
Fixed protection is another example of planning for the tax year-end where time is of the essence. If you claim fixed protection in a money-purchase scheme, a single contribution paid after April 5, 2012 results in its loss. It is still worth claiming, particularly if the fund is over £1.5m.
Unlike money-purchase, you can stay in a defined-benefit scheme accruing more 60ths or 80ths without losing fixed protection. This is because fixed protection is only lost if benefits increase from one year to the next by more than the relevant percentage.
For most schemes, the relevant percentage is CPI or a different rate if it was written into the scheme rules before December 9, 2010.
People whose pay is frozen can therefore claim fixed protection and accrue more benefit, because the extra 60th or 80th does not increase their pension by as much as CPI. This is a useful way of buying time for people close to retirement or as a permanent feature for the future.
It allows people to have the best of both worlds - further pension accrual and a lifetime allowance of £1.8m.
Opting out will be the best bet for some people. Frozen benefits are revalued on a statutory basis - currently 4 per cent for guaranteed minimum pension, CPI up to 5 per cent for benefits earned before April 2009 and CPI up to 2.5 per cent for benefits earned after that date.
The revaluation can often be worth more than another year’s accrual and clients save on the employee contribution.
John Lawson is head of pensions policy at Standard Life