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Take out EPP now to beat lifetime limit, says Lawson

Investors can effectively insure against breaking the lifetime allowance by taking out an executive pension plan ahead of A-Day, according to Standard Life marketing technical manager John Lawson.

Lawson says that by tak- ing out an EPP or any other money-purchase occupational scheme ahead of next April, investors can build up tax-free cash greater than 25 per cent of the fund before A-Day, off- setting the effect of the life- time allowance.

The limit is set to rise to 1.8m by 2010 but Lawson warns if the Inland Revenue’s considers that tax relief is not matched by tax takes, the limit could be frozen.

But as different tax-free cash calculations apply if an individual has an entitlement to more than 25 per cent, by taking out an EPP for a nominal amount, overall tax take can be cut and the cash lump sum boosted.

Even if the lifetime allow-ance hits 2.5m, an investor crystallising a 3.5m pension fund would get 25 per cent tax- free cash totalling 625,000, pay 55 per cent tax on the 1m over the lifetime limit if taken as a lump sum and use the remaining 1.875m to buy a pension so he would get a 1.075m lump sum. If the same investor put a nominal 20,000 into an EPP ahead of A-Day, when vest- ing his 3.5m, his tax-free cash would be calculated as two separate amounts so with the tax-free cash from the two pots, he would get 747,916 and his total lump sum would be 1,197, 916. He would pay almost 50,000 less in tax and get more than 120,000 more of his benefits in cash than if he had not bought an EPP.

Lawson says: “Even a fairly nominal contribution now for an EPP creates additional tax- free cash and takes out insurance against the lifetime limit.”

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