Clock ticks on pension lifetime allowance changes
Accountancy firms have until 5 April to make changes to clients" pensions to take advantage of the lifetime allowance or risk a hefty tax bill for clients warn Harris & Co accountants Northampton
The lifetime allowance is the maximum amount of total pension savings an individual can have which benefits from tax relief.
It was introduced at £1.5m in 2006/07, had risen to £1.8m by 2010/11, reduced back to £1.5m in April 2012 and from this April it will be reduced again, down to £1.25m.
The penalties for taking pension benefits of more than the lifetime allowance, known as the "lifetime allowance charge", are a tax of 55% on lump sums and 25% on income, which is then also subject to income tax.
As the lifetime allowance limits have changed we have seen transitional protection introduced which has allowed some people to protect larger pension amounts. However, these protection rules are complex and if accountants get it wrong they could face some angry clients who are faced with significant tax bills.
Individuals have until 5th April to apply for fixed protection which will protect their lifetime allowance at £1.5m and their entitlement to a higher tax free cash payout. If they don’t apply for protection, clients could face an extra tax bill of up to £137,500 (55% of £250,000) and so it is incredibly important that those with larger pension schemes review their options without delay.
This creates a potential problem for tax advisers. This aspect of pension planning can stray beyond tax advice into regulated financial advice. However, if clients aren’t registered for protection, and they subsequently face a bigger tax bill, it is possible that they will hold their accountant, who they trust to manage their tax affairs, responsible. If a client asks how much they can contribute to their pension, their tax advisers must not only consider their net relevant earnings, annual allowance and carry forward but also forecast what the client"s total pension benefits might be at retirement.
Historically, when preparing a self assessment return, employer contributions, whether to money purchase or defined benefit, would not have been required. It is possible that client"s may have pension assets that are not recorded on your files. With the upcoming reductions in the lifetime and annual allowances this is essential information and should be included in your information gathering and client acceptance procedures.
On the other hand, if accountants do ensure their clients are registered for protection, they then need to carefully manage all future pension provision as even one additional contribution will invalidate fixed protection. For example, they’ll need to ensure that there are no further employer pension contributions or accruals in defined benefit pension schemes. A particular challenge to this could be pension auto enrolment, where employees can be automatically enrolled into a company pension scheme and contributions then made on their behalf. This could conceivably mean a client facing an additional tax bill of £137,500 for the sake of a £50 pension contribution.
Accountancy firms have only two realistic options to mitigate these risks. The first is to provide an all-encompassing pension advice service to ensure they stay on top of their clients’ affairs.
The second, and for many accountancy firms the most practical, is to work alongside suitably qualified professionals, such as independent financial advisers, to ensure the best outcomes for their clients. However, with the deadline to apply for fixed protection only a few weeks away, the clock is most definitely ticking.