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Are your senior employees at risk?

The widespread changes to pensions in April 2006 (A-Day), imposed a limit on the amount any individual can accumulate in pension funds, referred to as the "lifetime allowance". This limit was set at £1.5 million in 2006/7, above which tax is payable at 55 percent.

At retirement, a person’s benefits are tested against this lifetime allowance. Those on or near the limit – which could include a huge number of senior staff who are members of final salary schemes – may need to act quickly to protect their existing funds and take advice on how to structure any further contributions, to avoid the considerable tax burden.

Many are unaware of the fact that if sizeable funds were built up pre-2006, then it is possible to freeze and protect them against the tax charge. However, the application must be made to the revenue by April 5th, 2009. And, employers must guide their staff through this complex issue.

The £1.5 million limit imposed is set to rise to £1.75 million in 2009/10 and then to £1.8 million in 2010/11 and many believed that it would continue to rise with earnings. For now, however, the Government has announced in the Budget that the limit will be frozen at next year’s rates until at least April 2016.

David Pugh is senior adviser at Foster Denovo.

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