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Think Twice Before Putting Any More Money Into Your UK Pension Advises AXIS Strategy Consultants

Watch out for changes in the UK Pension Lifetime Allowance in 2016
    PARIS, FRANCE, October 31, 2015 /24-7PressRelease/ -- This may be the recommendation given by your financial adviser if the total value of your UK tax relieved pension plans exceeds, or is close to exceeding, GBP1m after 6th April 2016. Tax penalties for having more than the Lifetime Allowance(LTA) after that point are punitive: 25% on income payments (in addition to normal income tax), and 55% on lump sums.

Lifetime Allowance rules were established along with other significant changes to UK pensions on 6th April 2006. The threshold for LTA for the tax year 2006/7 was set at GBP1.5m. Initially, tax penalties affected only a small percentage of the population as few people had UK pensions exceeding this value. The LTA limit was raised to GBP1.8m by 2010/11; as a result even fewer people were affected. It remained at that level for two years, then in 2012/13 it was back at GBP1.5m; then GBP1.25m in 2014/15. April 2016 will see the LTA reduced to GBP1m for holders of UK pensions.

Consequently many more people will be caught in the net, however the good news is that there are ways to avoid paying this tax and therein not suffer the resulting reduction in pension. As ever with financial planning, each person's situation is unique; advice has to be tailored to fit individual needs.

How can you avoid this tax? In general terms, there are three main options you might consider:
1) Investing money ear-marked for retirement purposes in other financial instruments such as ISAs, unit trusts, buy to let property, or simply in a bank account.
2) If your pension is already worth more than GBP1m, you can apply for "protection" which will allow you to maintain the previous GBP1.25m limit. This action will prevent you from putting more money into your pension pot.
3) Consider withdrawing money as early as possible from your pension. The earliest time that this can be done is at age 55. In the case of "final salary" schemes, the best way to manage the lifetime allowance is invariably to retire early.
4) If you live abroad, a QROPS plan may be the answer. By transferring into a QROPS, you arrest the growth of Defined Contribution plans and the Cash Equivalent Transfer Value (CETV) of Defined Benefit plans.

Expatriates whether on temporary assignment or retired should explore their options. Example: Paul has been transferred to an office abroad, he has significant pensions built up in the UK to the tune of GBP800,000. Given that the LTA will be reduced to GBP1m in April 2016, it would only take 4 years to exceed the limit with 6% average annual growth. Transferring into a QROPS at this point would hold the LTA value at the opening level, thus giving Paul further opportunity to invest in UK tax relieved schemes on his return.

For those who plan to retire abroad it's vital to keep an eye on the total value of all schemes prior to moving. Don't be surprised if your financial adviser recommends not to put any more money into your pension plan!


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Des Cooney
AXIS Strategy Consultants

Carrieres Sous Poissy, Ile de France
France
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