With rumours around the removal of the 50% tax rate and the reduction of the annual allowance, Skandia predicts that significant numbers of higher and additional rate taxpayers will use the coming weeks as an opportunity to maximise their contributions, and will then opt out of the pension system by applying for fixed protection. Once these wealthy individuals have opted out of the system, there will undoubtedly be a lower cost to the government going forward as the amount of tax relief they give away will reduce.
Those with sizeable pension funds have up until 5 April 2012 to apply for fixed protection and secure a lifetime allowance (LTA) of £1.8m. Once someone applies for fixed protection they are essentially opting out of the pension system as they can no longer make further pension contributions from the start of the next tax year.
HMRC have reportedly received an unexpected inflow of over 70,000 fixed protection applications already, with a spike expected in March and the beginning of April as people rush to get their applications in before the deadline.
Skandia expects the flight to fixed protection will be spurred by those concerned about the rumours regarding the removal of the 50% tax rate and the reduction of the annual allowance. People may consider maximising their allowances now, and then applying for fixed protection before the deadline.
People can maximise their contributions in this tax year by fully investing their allowance for this year, utilising unused allowances from the three previous years, and using up next year’s allowance through clever use of pension input periods. The maximum annual allowance is currently £50,000, which means someone who has previously built up pension savings but has not funded into pension arrangements in recent years could personally contribute £250,000 by utilising all allowances in one go, provided the contribution does not exceed 100% of relevant earnings. If the Government removes the 50% tax relief rate alone, this could mean a loss of £25,000 in tax relief, and if cuts are greater there will be a corresponding increase in the loss of tax relief.
For those applying for fixed protection, it is important they send their instructions by recorded delivery to ensure they are received by the deadline as HMRC may not acknowledge all applications due to volume. The £165,000 potential benefit received by having fixed protection far outweighs the nominal cost of postage (£1.8m - £1.5m LTA = £300,000 x 55% tax charge = £165,000 benefit).
Adrian Walker, Skandia’s pension expert, comments:
“It is interesting the high numbers who have already applied for fixed protection, as it is still early February. We normally expect to see a spike in these sorts of applications as tax year end approaches. The latest rumours surrounding the allowances are bound to have an affect and change people’s behaviour.
“People are urged to act now, as the new reduced pension allowances could come into force from Budget Day, the 21st March, not tax year end. If people have built up large sums of money, then applying for fixed protection will offer further tax advantages on their existing savings.”