£1.5 million sounds like a lot of money but if someone has 30 years until retirement they may only need a current pension fund of £197,000 to exceed that level before they retire based on a net investment growth rate of 7%. The table below shows the values for different time periods and more conservative growth rates. Anything over £1.5 million when clients take their pension benefits after the beginning of the next tax year will be taxed at 55% unless the client has already registered their pension for protection. 

 People in danger of exceeding the lifetime allowance can register for ‘fixed protection’ which will protect pension money up to today’s lifetime allowance of £1.8 million and will avoid a tax charge of 55% on the value of any pension fund between £1.5 million and £1.8 million. People have from now until the end of the tax year (5^th April 2012) to apply for fixed protection and HMRC has recently issued the forms and guidance necessary for people to do this.

Once someone applies for fixed protection, they cannot  make further contributions to a pension from the beginning of the 2012/13 tax year. They can, however, plough as much money as they are able to into a personal pension before the end of the current tax year, and then apply for fixed protection. The maximum they can put in this year is the greater of £50,000 or the amount they earn this year but if they have already done this they can utilise any unused annual allowance (up to £50,000 for each tax year) for the three previous years with careful planning.  They can even invest next year’s allowance by carrying forward any unused allowances from the previous three years, and changing their pension input period to allow next years’ contributions to be made ahead of the new tax year.  

Adrian Walker, Skandia’s pension expert, comments:

”People really need to think about this now. When something similar was done back in 2006, at A-Day, people had three years in which to review their pensions and apply for the forms of protection then available. Timescales to register clients for fixed protection today are considerably tighter.

“If people appear to be border line, in that their pension fund is already significant, and they don’t have that long left until retirement, it could be prudent to invest what they can now, and then apply for fixed protection.  They can always remove fixed protection further down the line if the fund does not grow as planned, and they have more money to invest. This is a complex area of retirement planning and an independent financial adviser can add real value.”

Appendix:

Table showing exact projection figures for various growth rates. Shows size of current pension fund, and whether a customer is at risk of breaching the £1.5m threshold.