The Perils of Being a Pension Millionaire

The new pension rules are great in many ways.  Flexibility, Inheritance tax planning, and sheltering tax are all good.  I’m a big fan of pensions and of regular long term saving, a strategy I call my ‘get rich slow scheme’.  BUT there has been one change which is really beginning to bite.  They have reduced the lifetime limit in pensions from £1.8 million to £1.0 million, progressively, over a number of years.

You might not think you have £1m in your pension….but you might also be surprised!  The £1m limit means that if on retirement you take out more than £1m you get a tax currently at 55% (nice).  Now before doing anything rash I’d wait until the July 8th Budget, Osborne may reduce the 55%.

For final salary pensions the way it works is that you pension has a deemed value, because of longevity (hurray) and very low interest rates your final salary rights are very valuable indeed.  You can get a statement from your provider or employer but here is an example of how it might work.

Salary on which final salary applied £64,285

Years in scheme 28

Pension rights per year 1/60

So you’d have pension rights of £30,000 pa (64,285 x 28 / 60) on retirement.

A £30,000 a year pension might be worth (deemed value) say £600,000, so with any other pension pots you might be approaching £1,000,000, especially if they are invested wizely and grow up to retirement.  Don’t forget that a £500,000 pension pot when you are 50 growing at 7% will be worth £1.7 million if you retire at 68!!!