“The lifetime [pension] allowance is due to reduce from £1.8m to £1.5m in April next year. If someone has 30 years until retirement they may only need a current pension fund of £197,000 to exceed that level before they retire, based on a net investment growth rate of 7 per cent," said Skandia’s pensions expert Adrian Walker.
The table below shows the values for different time periods and more conservative growth rates. Anything that hits more than £1.5m when investors come to take their pension benefits after the beginning of the next tax year will be taxed at 55 per cent, unless the client has already registered their pension for protection.
"People in danger of exceeding the lifetime allowance can register for ‘fixed protection’ which will protect pension money up to today’s lifetime allowance of £1.8m and will avoid the tax charge," Walker added.
People have from now until the end of the tax year, 5 April 2012, to apply for fixed protection.
Once they have applied for fixed protection, they will not be able to make further contributions to a pension from the beginning of the 2012/13 tax year.
Investors can, however, plough as much money as they are able into a personal pension before the end of the current tax year, then apply for fixed protection.
Source: Skandia
"If people appear to be borderline, in that their pension fund is already significant, and they don’t have that long left until retirement, it could be prudent to invest what they can now, and then apply for fixed protection," Walker continued.
"Investors can always remove fixed protection further down the line if the fund does not grow as planned, and they have more money to invest. This is a complex area of retirement planning and an independent financial adviser can add real value."
Projection figures for various growth rates
| Years from retirement |
7 per cent growth rate |
5 per cent growth rate | 3 per cent growth rate |
| 30 |
197,050 |
347,065 |
617,979 |
| 25 |
276,374 |
442,954 |
716,408 |
| 20 |
387,628 |
565,334 |
830,513 |
| 15 |
543,669 |
721,525 |
962,792 |
| 10 |
762,524 |
920,870 |
1,116,140 |
| 5 |
1,069,479 |
1,175,289 |
1,293,913 |
| 1 |
1,401,869 |
1,428,571 |
1,456,310 |
Source: Skandia