- Churchill Tax
Pensions
Auto-enrolment is bad news for some pension savers
There have been worrying reports that pension auto-enrolment might land anyone who has a large fund with an unexpected tax bill. Not so well publicised is that those with small pensions funds might also lose out. What’s the full story?
Auto-enrolment
Enforced enrolment in a pension scheme, so-called auto-enrolment, started for employees of large companies last October. Other workers will join the scheme as it’s phased in over the next few years. Virtually all employees must be automatically signed up, but you can opt out and for some people there’s now a good reason to.
Trouble across the board
It hasn’t taken long for some problems linked to auto-enrolment to surface. Anyone who’s taken pension protection (see below); those with pension savings totalling less than £18,000; and those who have funds worth £2,000 or less as part of their pensions portfolio are potentially affected.
What’s pension protection?
In 2006 an overall limit on tax-allowable pension savings was introduced, this is known as the lifetime allowance (LTA). The LTA currently stands at £1.5 million, but in 2014/15 this will reduce to £1.25 million. If you’re lucky enough that your pension fund ever exceeds the LTA, the Taxman will hit you with a bill of up to 55% of the excess. However, three types of election could have been made to protect against this. These are known as “primary”, “enhanced” or “fixed” protection.
NOTE:
Protection is available in other situations, e.g. where your pension scheme entitled you to more than a 25% tax-free lump sum. You’ll probably know if you’ve made an election, but if not speak to a pensions advisor, they’ll be able to find out for you.
The problem
If you elected for enhanced or fixed protection one of the conditions of this is that you must not sign up for another pension scheme. Auto-enrolment would mean that you break this condition and lose your protection.
TIP:
Act quickly as there are only 30 days from when your company auto-enrols you in which to opt out. Despite pressure from the pensions industry, HMRC says it will stick rigidly to this deadline.
Small (trivial) pension funds
Anyone whose pension funds total less than £18,000 can cash these in full once they reach 60.
TRAP
If your pension fund is small and you’re thinking of cashing it in under the pension rule, auto-enrolment could push your fund over meaning you would lose this right. So make sure that you opt out within the 30-day time limit.
Multiple small pension funds
Another rule allows you to cash in up to two pension funds if they are each worth £2,000 or less.
TRAP
If you’re auto-enrolled in a new pension shortly before you intend to encash, other small pension funds might limit your choice if they too qualify. This isn’t a reason to opt out of auto-enrolment, but you should take it into account.
Conclusion
If you have elected for “pension protection” this can be lost unless you opt out of auto-enrolment within 30 days. Where your total pension funds are worth £18,000 or less, you have the right to encash them in full, but where auto-enrolment causes your fund to exceed this limit you’ll lose the right to encashment.