Few members of defined benefit (DB) pension schemes will know if they are near the existing lifetime limits that determine the level of tax relief they will receive.
Members’ pension administrator will only be able to tell them whether they are nearing the lifetime limit in their current scheme, but benefits from all other schemes, both workplace and personal pensions, need to be taken into account when considering the lifetime allowance, which was introduced on 6 April 2006. Future investment returns should also be factored into members’ calculations.
Pension scheme members can currently receive tax relief on lifetime savings worth up to £1.5 million, the allowance that became effective from 6 April 2012. This is lower than the £1.8 million allowance of 2010/11. The lifetime allowance will fall again to £1.25 million on 6 April 2014.
Members with pension savings worth more than £1.5 million have been able to apply for lifetime allowance protection, which enabled them to avoid paying the lifetime allowance tax charge on pension funds in excess of £1.5 million accumulated before 6 April 2006.
New protection was introduced for members with savings of more than £1.5 million but no more than £1.8 million built up before 6 April 2012. Now ‘fixed protection 2014’ will be introduced from August 2013 for members with pension pots of more than £1.25 million but no more than £1.5 million.
Members should note that the period over which pension savings are measured might not match the tax year.
Chris Judge is manager at Reeves Financial Planning