TT133: Pension Pot Protection

February 25, 2009

The pension landscape changed in April 2006 when the limit on contributions was loosened, but replaced with a limit on the amount that you can have in a pension fund.

The limit then was set at £1.5m and is now £1.65m for the current tax year, £1.75m next year and£1.8m in 2010-11. The limit is then frozen until at least 2015-16 following the Pre Budget Report last autumn. This cap could turn out to be very unfortunate for some.

If the surplus is taken as a lump sum, then a 55% tax charge applies. If taken as income, a 25% tax charge on top of normal income tax charges applies.

Now Is The Time To Act:
Anyone wishing to protect large pension funds from the taxman needs to act now!

If your pension fund is greater (or you believe may eventually be greater) than the government’s lifetime allowance, then you need to apply for tax protection by 5 April 2009 or you could suffer the unpleasant 55% tax charge on the excess.

Prepare For Tommorow:
There are two options, primary protection and enhanced protection.


Primary protection is for those whose pension entitlement was greater than £1.5m at 5 April 2006. It protects the funds built up prior to this date on a proportionate basis. A fund of £2m on 5 April 2006 would be protected up to 1.65/1.5 x £2m = £2.2m.

Enhanced protection protects all pension rights from the lifetime allowance charge. It’s for those whose pensions rights were either below or above the lifetime allowance on 5 April 2006. However, for enhanced protection to be maintained, strict limits apply to the accruals allowable under defined benefit schemes, no further contributions can be made to defined contribution schemes and care is required on whether transfers are allowable.

A typical scenario could be a pension entitlement that was valued at £1.2m at 5 April 2006 and which you do not intend to take benefits until 6 April 2010. The standard lifetime allowance at that time will be £1.8m and you think that your pension rights will be worth more than £1.8m at that date. If you do not register for enhanced protection and your rights are worth £2m when you take them on 6 April 2010, you are liable to a lifetime allowance charge on £200,000. If the £200,000 is taken as pension, the lifetime allowance tax charge is £50,000 (25%) and then it will be further taxed at your marginal rate of income tax. If taken as a lump sum, the lifetime allowance tax charge is £110,000 (55%) with no further tax to pay.

However, if you register for enhanced protection and you keep to the rules, there will be no lifetime allowance charge. The entire £2m fund can be used to pay your benefits.

Pensions can be difficult to value. Whilst money purchase schemes are relatively straightforward, a defined benefit scheme where benefits have yet to be taken, each £1 per annum of pension is valued as £20 against the Lifetime Allowance. Therefore a defined benefit of £75,000 per annum pension equals the 2006-07 £1.5m Lifetime Allowance. Don’t under estimate the size of your benefits!

Remember The Deadline, Make The Claim:
The required information from pension providers needs to be obtained and this can take time. A special form then needs to be submitted in time for 5 April 2009.

To make a claim, download form APSS 200 from the HMRC website at or by clicking here

Barnes Roffe Topical Tips:

    • We strongly suggest you take advice before submitting your claim.
    • Get this advice well before the 5 April 2009 deadline.
    • Contact your Barnes Roffe LLP partner if you wish to discuss this or need introducing to a suitably qualified pension advisor.
  • Finally, did you know that less than 6% of small and medium businesses have shareholder protection in place to ensure that funds are available to buy out a shareholder in the event of their death? Watch out for a Topical Tips on this point coming soon.

And a final note on another important VAT matter
Due to a recent ruling, claims (known as ‘Fleming Claims’) can be made to reclaim under-recovered input VAT paid before 1 May 1997 and to reclaim overpaid output VAT declared before 4 December 1996. In some cases, recent court rulings can be used and their impact backdated to make a reclaim. All claims must be submitted before 31 March 2009. In particular charities, car dealers, hot food retailers and members clubs should consider their position. Other more diverse businesses such as bowling alleys, skating rinks, etc. should consider it too. If you think this will benefit your business you must act now!

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