New tax cap to hit better-off pensions

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How many Britons have more than £1m stashed away in their pension? Answer: a surprisingly large number. It's thought tens of thousands could be impacted by the new lifetime pension cap allowance being snipped from £1.5m to £1.25m (though the Lib Dems want this cap slashed to £1m in future).

Do you need to act?

55% hit

If you're in this fortunate position and want to make your financial affairs as tax-efficient as possible, then possibly yes. Lump sums above the £1.25m threshold will be slapped by a 55% rate, though more regular pension contributions will be taxed at 25%.

One route to look at closely is so-called 'fixed protection' which would put a cap on your total allowance at £1.5m. Another route, potentially, is to apply for 'individual protection', though clarity from HMRC on this is still being hammered out.

Richard Brand, a financial adviser from EOS Wealth Management, told AOL Money that the time window - 6 April 2014 - is very short.

"Six months is a very short period of time for people with pension funds of £1.25 and £1.5m to make an informed decision on whether it's right to do it. But I don't think people are going to be in a position to be thoroughly informed in sufficient time to make a decision."

Off limits?

According to the Telegraph, HMRC calculates that "someone retiring on a final-salary scheme before April 2014 will just fall within the current cap if their pension (after taking the maximum lump sum) is about £75,000."

"But from April, they will remain within the cap if their pension (again, after the maximum lump sum has been taken) is no higher than £56,250."

Check your numbers

Those with defined benefit schemes will need to be especially careful, especially if you've been topping up your pension from savings. Investors Chronicle warned earlier in the year that if you "left employment many years ago but still retain pension rights, then you need to check what that [your pension] is worth today."

It goes on: "A DB [defined benefit] pension that was expected to pay out £20,000 a year 20 years ago, in 1993, today counts £700,000 towards the lifetime allowance - as the Inland Revenue multiplies the annual value of DB benefits by 20 when calculating the figure and then adds on inflation."

Which could take you very close, if not over, the £1.25m cap. Critics though will claim that the move will discourage more people to save for their retirement, despite the lofty cap. For example, if your pension fund has £400,000 in it with 15 more years to run, it's likely it could breach the revised threshold thanks to compounding and dividend re-investing.

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