Pension allowance changes: how to protect large pension pots

From 6th April, the annual allowance and the lifetime allowance for pensions will both fall. But you can protect large pots from being affected by the drop.

Next week will see significant changes made to the amount people can save into their pensions on an annual and lifetime basis without facing tax. Let's take a closer look at what's happening and what can be done to protect yourself.

What are the changes?

From the start of the new tax year on 6th April, the annual allowance for pensions will be reduced by £10,000 to £40,000. This figure is the maximum amount that you can pay into your pension scheme per year.

The pension lifetime allowance, which limits the total amount of untaxable money that can be held in pensions, is also falling. It will be reduced from £1.5 million to £1.25 million. If more than this sum is held in pension savings after 6th April 2014, the excess will be subject to a tax charge.

Take control of your pension with a SIPP

How can I protect my pension?

Most of us can only dream of building up such a large pension pot. However, if you're one of the lucky ones, there are things you can do.

One option is to apply for fixed protection 2014. This essentially lets you protect your own lifetime pension allowance at the old threshold of £1.5 million. This means you can save up to £1.5 million in your pension without having to worry about paying the lifetime allowance charge (currently set at 55% if the excess over the allowance is paid as a lump sum, or 25% if it is paid as part of your pension).

You will lose this fixed protection if:

• you have a contribution paid to any of your money purchase (otherise known as defined contribution) pension pots
• you build up new benefits in a defined benefits or cash balance pension pot above a set amount
• you join a new pension scheme - unless you're only transferring pension savings from one of your existing schemes into the new scheme
• you start saving in a new pension pot either under an existing pension scheme or a new pension scheme

So in effect, you can protect your lifetime allowance, so long as you don't make any new contributions into your pension from 5th April onwards. As a result you need to bring forward any pension contributions to plan to make in the future if you want to make the most of this protection!

If you wish to apply for fixed protection then your application will have to be received by HMRC before 6th April 2014. Relevant HMRC forms and the online application system can be found here.

Take control of your pension with a SIPP

Individual protection

There is an alternative for people that still want to contribute to their pension pot after the new tax year in the form of individual protection 2014.

This is open to people with pension pots of between £1.25 million and £1.5 million, and allows you to set your lifetime pension allowance at the value of your pension pot on 5th April. So if your pension pot is worth £1.3 million on that day, that will be your lifetime pension allowance even after the new cap is introduced.

As with the fixed protection 2014, to make the most of this you really need to bring your pension contributions forward and pay as much as possible into your pension before the end of the tax year.

If you wish to apply for individual protection, you will need to send an application form to HMRC before 6th April 2017. Those forms will be available from mid-August 2014, and you can read more about individual protection in this document.

Take control of your pension with a SIPP

More on pensions:

New State Pension top-up scheme explained

How to get a State Pension forecast

Workplace pensions: what it means for you

How to get a big income from a small pension pot

How to make sure you have enough money in retirement

What is income drawdown?