Act Now or Pay Up to 100,000 GBP in Tax if You Are Expecting a Pension Income of Over 62,500 Per Year
Higher rate tax payers have had to fork out as much as 100,000 GBP in tax as the “lifetime allowance” for pensions has been lowered again by the Inland Revenue.
If you are expecting to receive a final salary pension of above 62,500 GBP, you could be in danger of paying a 55% tax on any cash lump sum you take from your pension pot above 1.25m.
But, pensioners have until the 6th April to apply for protection before the cap is lowered again (see link below).
The pension cap which allows a certain “lifetime allowance” before you start to get taxed was at 1.8m GBP in 2008, but in 2012 the LTA on pensions was lowered to 1.5m and the “lifetime allowance” will drop again to 1.25m on April 6th, 2014.
Many pensioners have been caught out by this pension cap and now face tax bills of 100,000 GBP or more. The “lifetime allowance” (LTA) is a pensions cap (or the upper pension limit) on how much can be saved in a UK pension and receive tax relief. At retirement, any benefits above the allowance are taxed at either 55% if taken as a lump sum or 25% if taken as income.
As I wrote in articles last year, pensioners could have protected themselves from the LTA with “enhanced protection” or “fixed protection”. If a member expects their pension savings might be more than £1.25 million (including taking into account past crystallisations) when they come to take their benefits on or after 6 April 2014, they can use fixed protection to help reduce or mitigate the lifetime allowance charge. Fixed protection allows individuals to crystallise benefits worth up to £1.5 million without paying the lifetime allowance charge, although the ability to accrue future benefits is limited.
The drop in the pension cap from 1.8m to 1.5m has hit doctors, lawyers and senior CEO’s, but this new lowering of the upper limit means senior managers across the country will be affected. Pension experts warn that the new cap will come in if you have a defined benefit pension which you expect will give you a pension of around 62,500 GBP at retirement.
There is still time to apply for fixed protection before April 6th, 2014 and pensioners can apply for the protection on HMRC’s website.
Here is the link to apply for fixed protection 2014 online. You’ll need to have your National Insurance number ready.
For British expats who live abroad, we can help you avoid taxes altogether in the UK, The Qualifying Recognized Overseas Pension Scheme (QROPS) which has been around since 2006 allows you to legitimately transfer your pension offshore to avoid paying UK taxes.
- If you are living abroad and intend to retire abroad, there is little sense in keeping your UK pension under the UK system and getting taxed in the UK
- Instead, you can gather all your pensions together and transfer them to one large offshore tax-free pension pot
- You will avoid all UK taxes as long as you live outside the UK
- You can take a larger cash lump sum at 55
- You can take a larger pension income
- You can move your pension to the currency of your choice, e.g. USD or EUR or keep in GBP
- You can choose where to invest your funds, i.e. in property funds, mutual funds, bonds, ETF’s, gold, silver or cash
- You can choose who the pension is left to upon death, e.g. 50% to partner, 25% each to two children
Contact us for a QROPS flowchart which explains how pension transfers offshore work. We can also find you the best value QROPS providers and put you in touch with the top investment fund managers to target higher returns for your pension.Pension Income of 62,500+ GBP? Act Now or Face 100,000 GBP in Taxes by Richard Malpass