Chancellor George Osborne gave his Autumn Statement on 5 December 2012. This included a number of measures that will affect pensions savers, particularly those with larger pots.
Lifetime Allowance (LTA) cut again
The LTA is the total value of all pension funds you can accrue without attracting an excess tax charge. The allowance was cut on 6 April 2012 to £1.5 million (from £1.8 million) and the Chancellor announced today that it's going to be cut again from 6 April 2014, to £1.25 million. That's a reduction of just over 30% in two years!
As with the last reduction, there will be an opportunity to apply for protection if you think you will be over the £1.25 million limit at retirement.
What should you do if this affects you?
If you are over 55 and have more than £1.25m in your pension funds, or think you are likely to by 6 April 2014, you should speak to your financial adviser about your options to reduce your accrued fund value before the deadline. Alternatively, you can apply for protection once it becomes available next summer.
You should also speak to your financial adviser to discuss whether your pension is large enough to provide for your needs in retirement. If not, you will need to update your investment strategy.
Annual allowance cut
The annual allowance is the total amount you and your employer can save into your pension fund without being subject to an additional tax charge. It is being cut from £50,000 to £40,000 from 6 April 2014.
What should you do if this affects you?
If you have unused pension allowances, you should make the most of these before 5 April 2014 to reduce the impact of the lowered limit. You can carry forward unused pensions allowances for up to three tax years.
You will also need to review your contributions to ensure you are under the contributions limit from 6 April 2014 and speak to your financial adviser to discuss your options to ensure your retirement savings will provide you with the lifestyle you want.
Drawdown maximum pension increased
The one piece of good news around pensions was that pensioners who are currently taking their income in the form of 'capped drawdown' can now take up to 120% of the 'Government Actuarial Department (GAD) rate again. This was reduced from 120% in 2011 but with gilt yields at historic lows (a result of quantative easing aimed at stimulating the economy), the rule was squeezing many pensioners' incomes.
What should you do if this affects you?
We are still waiting for details of how soon someone in drawdown can access the increased rate, but expect that it will be from the next annual anniversary of the last drawdown review.
We would recommend you contact your financial adviser and ask them to update you as soon as the rules are announced.