Just when you thought it might be safe…. the Lifetime Allowance will drop from £1.5m to £1.25m in April of this year.
Not a problem, I hear you cry … but could it be?
Savers with pension pots greater than £1.25m could be hit with a tax charge of up to 55% of the amount over the Lifetime Allowance when they come to take their benefits. So an individual with a pension pot of £1.5m (currently within the Lifetime Allowance limit) could face a charge of up to £137,500 if they do not protect themselves from the looming cuts to the lifetime allowance.
Hold on…What is the Lifetime Allowance?
The Lifetime Allowance is a limit on the value of pay-outs from your UK pension provision – whether lump sums or retirement income – that can be paid out without triggering an extra tax charge.
We have already seen the Lifetime Allowance cut from £1.8m to £1.5m in 2012 and now again to £1.25m. So, what can be done for those who may be affected?
Fixed or individual protection – help is at hand…
The UK government has introduced two new protection options to secure a higher Personal Lifetime Allowance; Fixed Protection 2014 and Individual Protection 2014.
Fixed Protection 2014
A successful applicant to Fixed Protection 2014 will have their Lifetime Allowance fixed at £1.5m and therefore will not have to pay a lifetime allowance charge on their pension savings up to £1.5m – a potential tax charge saving of £137,500.
Fixed Protection 2014 is only available to individuals that do not already have Primary, Enhanced or Fixed Protection (2012).
Individual Protection 2014
Individual Protection is only available to those with pension savings in excess of £1.25m on April 6 2014. Upon application, the individual’s personal Lifetime Allowance will be equal to the value of their pension rights on April 5 2014 – up to an overall maximum of £1.5m.
These options should be considered carefully and the best option for you will be dependent on your individual circumstances.
Pension savers will have up to April 5 2017 to apply for Individual Protection 2014. We do not expect to see an application process announced by HMRC until Autumn 2014.
Individuals can apply for Fixed Protection 2014 and Individual Protection 2014 so these options should be considered carefully, and the best option will be dependent on individual circumstances.
HMRC have created a Lifetime Allowance checking tool, which can be used to help you and your adviser decide whether to apply for Fixed Protection 2014 and/or Individual Protection 2014.
Is there anything else I can do?
Anyone heard of a QROPS? Another possible solution to this issue could be in transferring your pension to a Qualifying Recognised Overseas Pensions Scheme (QROPS).
Portuguese income tax on QROPS income
A QROPS can be very tax efficient for Portuguese residents but the income must be structured correctly.
By transferring to a QROPS you immediately benefit from receiving the income gross whether in the UK or Portugal. It is then for you and your tax professional/accountant to declare the income via your UK self-assessment or Portuguese tax return.
The Portuguese tax office, Finanças, will treat you as tax resident if you spend more than 183 days in the country.
By transferring your UK pension to QROPS, the fund will be allowed to grow in excess of the £1.25m without tax charge.
Next steps – what should I do?
First and foremost, you need to talk to a qualified financial adviser. Blacktower has held a presence in the Algarve for over 15 years now and fully understands how best to structure and manage client wealth for your benefit and for your future generations.
By Robert Mancera
Robert Mancera is Director of Blacktower Financial Management (International) Limited. 289 355 685 | [email protected] | www.blacktowerfm.com
Blacktower Financial Management (International) Limited is licensed by the Financial Services Commission in Gibraltar. Blacktower Financial Management Limited is authorised and regulated by the Financial Conduct Authority in the UK.