Experts say around 10,000 people who protected their pension pot from high tax charges in 2006 could be better off if they take their benefits before the lifetime allowance is reduced next year.
In his Autumn Statement in December, chancellor George Osborne announced plans to cut the lifetime allowance from £1.5m to £1.25m from 6 April 2014. The annual allowance will also be reduced from £50,000 to £40,000.
The Government is considering introducing two new forms of protection for those who are close to the existing lifetime allowance – fixed protection and ‘personalised’ protection.
If a client takes the new fixed protection they will need to cease contributions by 6 April 2014. If they do this, they will keep the maximum tax-free lump sum of £375,000.
HMRC could also bring in a new personalised protection regime for those with a pension pot worth more than £1.25m on 6 April 2014.
Aviva corporate benefits head of policy John Lawson says around 10,000 people who took out enhanced protection on A Day on 6 April 2006 will need to review their pension before April 2014 in light of the lifetime allowance cut.
This is because the maximum tax-free lump sum they can take will fall from £375,000 to £312,500.
He says: “As the lifetime allowance falls, the amount of tax-free lump sum you can take falls as well. To protect yourself against that, you can take the benefit before it falls or apply for the new fixed protection.
“Advisers should go through their customer base and have a conversation about the impact this will have on their tax-free lump sum. Some people will be better off taking their pension before 6 April 2014 and getting the extra tax-free lump sum.”
Syndaxi Chartered Financial Planners managing director Robert Reid says: “This is another example of why it is so difficult to give people long-term advice.”