A payroll quirk means thousands of high earners who applied in March or April to protect their pension against the new £1.25m lifetime limit will be rejected, financial advisers are warning.
Some 50,000 savers applied for fixed protection 2014 in the last tax year, which allows them to avoid punitive tax on pension savings between £1.25m and £1.5m, as long as they stop contributions for good. Their pensions savings can then grow free of the additional tax levied on contributions over £1.25m.
A pension contribution of even 1p would make the protection void and leave pension savings above £1.25m open for HM Revenue & Customs to take 55 per cent.
The deadline for applications was 5 April, but many savers have been unaware that unless they told their payroll departments to stop their March pension contribution, the protection would instantly be void because once payroll payments have been made they are irreversible.
The most common payroll date is the 10th of the month.
Financial advisers say they were inundated with last-minute calls from people asking for help applying for protection, who were unaware that it was already too late because their March pension payments had not been cancelled.
The little-known quirk meant even some companies’ financial departments were too late to remind their high earning staff to apply for fixed protection, even though they were weeks ahead of the deadline. One adviser with a number of clients at the BBC said the media station’s financial department sent a reminder out in March - giving staff very little time to apply.
HMRC estimated that around 120,000 workers on medium to high wages would be hit by the introduction of the new ceiling, but it has now revealed that less than half this amount (50,000 people) applied for fixed protection by the deadline. The taxman says it does not keep details of the number of applications that have been rejected.
If you've got a big pension and find out your application for fixed protection has been rejected, you can still (if you haven’t already) apply for Individual Protection 2014 (IP14) to protect it from the lifetime allowance charge.
Individual protection 2014 will give a protected lifetime allowance equal to the value of your pension rights on 5 April 2014 - up to an overall maximum of £1.5m. You'll not lose individual protection 2014 by making further savings in to your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.
If your fund is worth more than £1.5m you can apply, but IP14 will be capped at £1.5m.
