One option for people who will be affected by the reduced LTA is to apply for ‘fixed protection’. This will provide a higher LTA of £1.8m, but has a downside, in that no further pension contributions can be made. 

An alternative option is to take some money out of the pension system now, which will free up more lifetime allowance for use going forward. This alternative option could suit those who want to continue their pension contributions and who are considering drawdown of some funds in the near future. It works on the principle that money taken by 5 April 2012 will use up less of the person’s LTA than if it is taken on or after 6 April as it is calculated as a percentage of £1.8m rather than £1.5m.

The table below demonstrates how taking £600,000 from a pension fund before 6 April will mean only 33.3% of a person’s LTA is utilised, compared to 40% after 6 April. In monetary terms, this 6.67% difference means an extra £100,000 of pension savings can be created without incurring a 55% tax charge for exceeding the LTA of £1.5 million.

Adrian Walker, Skandia’s pension expert, comments:

“With the new £1.5m LTA coming into force on 6 April 2012, it is imperative that anyone who thinks they may be affected seeks advice now, as pension savings in excess of the LTA could be subject to a 55% tax charge.

“People who want the option of being able to make further pension contributions could consider drawing down some of their pension funds prior to 6 April as an alternative to applying for fixed protection. This will help maximise their available LTA as the amount withdrawn will be tested against a £1.8m LTA rather than £1.5m LTA. This can make a significant difference to a person’s remaining LTA. However, accessing pension money is something that should only be considered if the money is required, as any money in drawdown is subject to a 55% tax charge on death.”