The Lifetime Allowance
At present we can all have £1.5M of value in a registered pension scheme. This is known as the Lifetime Allowance. As soon as you crystallise benefits from a pension and go over the Lifetime Allowance you lose the current entitlement to a tax free lump sum on that part and all benefits in excess incur a Lifetime Allowance tax Charge of 55%.
From 6th April 2014 the Lifetime Allowance reduces to £1.25M. It is possible to apply for Fixed Protection 2014 prior to that date which means that providing that you make no further contributions to a pension and do not create a new pension arrangement then you can retain a personal Lifetime Allowance at the £1.5M level.
Pension Credits and HMRC’s Stance with Fixed Protection
HMRC’s stance with regards to Pension Sharing Orders and Fixed Protection is that if a Pension Sharing Order is implemented in a new arrangement after 6th April 2014 this will break the Fixed Protection and you would revert to a £1.25M Lifetime Allowance. However, providing the Pension Credit is received by an existing arrangement after 6th April 2014 then Fixed Protection can remain in place.
Where a Defined Benefits pension scheme allows the Pension Credit member to become a member of the Defined Benefits scheme in their own right, receipt of the Credit after 6th April 2014 could also result in the creation of a new arrangement and the loss of Fixed Protection. If you are in this position you should aim to conclude matters in good time or be left with a conundrum in the new tax year; either apply the Credit to the Defined Benefits plan to enjoy the higher, known income but minus a Lifetime Allowance Charge or transfer the Credit to an existing money purchase arrangement and retain Fixed Protection.
It should be kept in mind that negotiations taking place today could well result in the Pension Credit being received after 6th April 2014.
Action Needed Prior to 6th April 2014
Many occupational pension schemes insist on the Pension Credit being transferred to a different plan. It is imperative that where your pension funds will be close to £1.25M after the divorce that you have an existing arrangement that is suitable for receiving the Pension Credit by the end of the current tax year. You also have to apply for Fixed Protection 2014 prior to the 6th April 2014 deadline.
Consequences of Losing Fixed Protection 2014
The consequences to a higher rate tax payer of not applying for or losing Fixed Protection 2014 on the £250,000 between £1.25M and £1.5M are as follows:
Accessing under the Lifetime Allowance (such as using Flexible Drawdown)
Accessing over the Lifetime Allowance Charge
Planning ahead in good time could therefore save £62,500 in tax. The tax saving may be greater than this if the pension holder has some of their basic rate tax band remaining.
A Suitable Existing Arrangement
Even where you have no suitable pension plan currently you can put one in place ahead of time. People with no earned income can make a pension contribution of up to £3,600 gross each tax year. The sum you invest to create the new plan should be sufficiently small to minimise the amount of your pension expected to be over the Lifetime Allowance in the future. However, you also need to be mindful that pension plans suitable for pension funds of this size, such as those that allow Flexible Drawdown, have minimum contribution levels.
As a Pension Specialist, Divorce Specialist and Chartered Financial Planner I would be happy to provide further information or advice if you are effected by this.
The UK equity market retreated in November, only the second month in 2017 where we saw a meaningful fall in the key FTSE 100 Index. Comments made by Mark Carney, following the November Base rate rise, highlighted the Bank’s view that inflation will be a problem for some time to come and how business and consumers react to this will determine the path for the UK economy over the coming months. The Bank said in a statement: “The decision to leave the European Union is having a noticeable impact on the economic outlook.
The Bank of England’s decision at the start of November to raise interest rates for the first time in 10 years was widely expected and caused little initial stir in the markets. Since then the FTSE 100 has fallen a couple of percentage points at the time of writing. Perhaps the combination of negative talk around Brexit combined with the prospect of rising interest rates are starting to bring back a little fear to the market which has, for some time, felt like it has been in a state of complacency.
Most commentators expect interest rates in the UK will rise for the first time since July 2007 when the Monetary Policy Committee (MPC) of the Bank of England next gets together for its monthly meeting on 2nd November 2017. Indeed, Mark Carney said on the BBC Today programme, shortly after the minutes of last month’s meeting were released, “What we have said is that if the economy continues on the track that it has been on - and all the indications are that it is - in the relatively near term you can expect that interest rates will rise”. He went on to say, “We are talking about just easing a bit off the accelerator to keep with the speed limit of the economy”, which has been widely predicted to mean that rate rises will be gradual and measured.
Our reason for showing these graphs is to highlight that the VIX index is trading back at 2007 levels of low volatility while stock markets are at all-time highs. We can no more see the future than anyone else but we do know that when it comes to investing, the most money is often made when every sinew in your body is screaming that it is madness to invest, and that sometimes the opposite is true.
It has been a strong start to the year for investment portfolios, mostly driven by signs of continued strength in the US Economy and the promise of more to come under the Trump presidency. Markets always move ahead of the economy so to make money, investors will position portfolios to benefit from what they think is around the corner. But what if the promise does not materialise? One fund manager described this recent wave of enthusiasm as the “Trump Bump” and that this may well be followed by the “Trump Dump” if the new President is unable to deliver on his campaign promises due to lack of support from political colleagues. In this respect, it seems that the failed repeal of Obamacare has given investors pause for thought over the last week or so.
While some asset classes are looking expensive, on an individual basis, there remains optimism amongst fund managers. Those who particularly seek to invest in undervalued, unloved but robust companies can see plenty of scope for increased valuations in their investment pool.
Eight years have now passed since the FTSE 100 hit its Credit Crunch low point. In investor memory, particularly among younger investors, we are getting to the point when the slide that started in summer 2007 down to its nadir risks being forgotten. We don’t know what the future holds but the past tells us that investing needs time on your hands to ride out the tough times. We’re confident that investing remains the best long term strategy for your money but make sure that you understand the strategy you are taking and that your portfolio is right for your attitude to investment risk and your time frame.