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Changes to be made to lifetime pension allowance

In just over a month the lifetime pension allowance - the maximum value that can be accumulated within all pensions before incurring an exceptional tax charge - will fall from £1.8m to £1.5m.

If the total value of an individual’s pension schemes exceeds this amount, the surplus will incur an exceptional tax charge of 55 per cent, or 25 per cent, depending on whether the individual draws his or her benefits as a lump sum or as income.

Investors who already have pension savings of £1.5-£1.8m, or who expect to breach the £1.5m new allowance by the time they draw pension benefits, can seek protection as long as they do so before 5 April 2012.

Firstly people need to calculate the value of any money purchase or defined contribution pension savings by asking their pension administrator.

The second step to working out the valuation of final salary or defined benefit schemes can be more complicated. HMRC calculates this as being the income that you would be entitled to multiplied by 20. So if you have final salary benefits, these could significantly increase the total value of your pensions.

An additional complication is that anyone who already holds primary protection or enhanced protection for their pension savings is not entitled to fixed protection, and the protection already held will continue to apply.

HMRC will grant fixed protection to members who want to protect themselves from this reduction in the lifetime allowance as long as no further contributions are be made by you or on your behalf.

While fixed protection does impose additional restrictions on your pension, investors can still transfer existing money purchase or defined contribution savings into your self-invest personal pension.

For more information please contact Paul Bradshaw at McEwan Wallace Wealth Management on 0151 647 6682 or email enquiries@wallace.co.uk.