Thursday 6 April 2006 = Pension A-day

From 6 April, affectionately known by HM Revenue and Customs as A-day, important changes to the way pensions operate will come into force, in accordance with the Finance Act 2004.

From that date, a lifetime allowance (LTA) limit will be applied to accumulated pension funds before additional tax is charged. For the 2006-07 tax year, the LTA is £1.5 million; it will increase each year. Funds exceeding the LTA amount will be taxed at an additional rate of 55 per cent of lump sums and 25 per cent of annual pensions.

In regards the Teachers' Pension Scheme (TPS), this means that additions over about £195,652 will be taxed at 55 per cent, and any aggregated annual pension income exceeding about £65,217 will be taxed at 65 per cent (40 per cent higher rate of tax plus the 25 per cent additional rate of tax).

The LTA applies to the sum of all pension benefits including, in the case of teachers, those accruing from the TPS, the Prudential Teachers' AVC Scheme, FSAVCs and from private pension schemes.

To work out whether you may be affected by the provisions simply multiply the sum of all your accrued potential pension income by 20 and add in any accrued lump sum entitlements.

If the result comes close to or exceeds £1.5 million, you will need to take some action to protect your accrued pension benefits, preferably before A-day though you will have a three-year grace period in which to protect your benefits from the application of the additional rates of taxation.

If you are one of the very few teachers who already have pension funds in the region of £1.5 million, HM Revenue and Customs will recognise existing benefits from tax-approved schemes (including the Teachers' Pension Scheme and the Prudential Teachers' AVC scheme) that exceed this sum as long as protection has been granted.

To protect your pension from the LTA charge you will need to request an application form for 'primary protection' from your local tax office. Once your application has been accepted and is in place you can continue to make contributions to the Teachers' Pension Scheme and increase your benefits without attracting the LTA charge.

It is entirely down to individual members to ensure they are protected from the LTA charge.

Mac Podmore, ASCL pensions consultant