If your Pension Pot hits a Million you could be Hit with 55% Tax Bills
According to a growing number of accountants, pension savers whose pots are approaching the million pound mark are walking into a tax – trap. This would incur a 55% tax levy.
Where this will bite hard, is should this happen out of the blue. A 55% tax bill is never warmly received.
Am I at Risk from a 55% Tax on my Pension?
Although everyone’s circumstances are different you are particularly at risk if you are currently earning around £74,000 per year or higher. Public sector final salary schemes are particularly at risk from incurring the 55% tax rate on their pension. Defined benefit scheme holders however, can also breach the cap come retirement.
The cap on pensions is currently £1.25 million. This was reduced from 1.8 million in 2011. From April 2016 this will reduce again to £1 million. According to Treasury figures around 72,000 people will be affected by the April 2016 pension cap reduction.
Final Salary Blues
Although defined contribution schemes can be affected, final salary holders have little control of whether they exceed the pension cap. This is because their pensions are paid from taxation and not from a steadily growing pot. To work out whether you will be affected by the cap, you need to find out what your salary will be at retirement age and multiply this by 20. If it exceeds a million pounds you will be hit with a 55% tax bill on your pension.
If you’re final salary is expected to be around £40,000 come retirement you could be at risk.
Defined Contribution Schemes
The problem faced by defined contribution scheme holders is this: As your pension pot grows due to interest over a long period of time, you could reach the £1 million mark. At this point your pension is taxable at 55%.
So, if your pension has hit say the £200,000 mark and you have about thirty years to go before retirement, even if you did not pay in another penny, accumulated interest could see it ping the million.
How can I avoid hitting the Pension Cap?
You can apply for pension protection from the Government. To avoid the higher tax rate you have to apply before 2017 and you can only apply if your pension pot at April this year is already at £1.25 million or greater.
In all instances you need to speak to a pension and taxation expert, and you need to be considering options such as retiring early, or stopping your contributions. As you can imagine this is a fine balancing act as future governments can easily modify the pension rules.
If you’re concerned about the pension cap talk to me immediately. Click here and complete the Call Back Service form. Together we can avoid the tax minefield pensions conjure.
Source: Daily Mail