The property is key to the successful running of his business. It is leased back to the business, and rental income of £40,000 per annum is payable by the principal employer to the pension scheme. No regular contributions are paid into the scheme.
Compound growth looms
The length of time to retirement and the compounding of the rent (which, in effect, acts as a contribution) means that, with just a little over 1% annual investment growth, there is the probability of exceeding the £1.5 million lifetime allowance.
If the lease to the property contains an upward-only rent review clause, the rent will increase.
Jim has a number of options:
As there were no regular contributions in, and with tax advantage rolled up in the scheme, this third choice could work.
Fixed protection
Fixed protection 2014 would also be an option because it would protect the lifetime allowance of £1.5 million and, because there are no contributions, the prohibition on new money would not be an issue. Individual protection would seem to be out of the question, because the fund was not at the £1.25 million level.
The big problem is that the growth on the fund should comfortably exceed 1% per annum, meaning Jim needs to make a choice, particularly with regards to the property.
There could be a real issue for many people with reasonably sized pension funds, particularly if they have committed to pay regular contributions.
In effect, the reduction in the lifetime allowance acts as a tax on investment performance, meaning a lot of planning will be needed for a lot of people.
Mike Morrison is head of platform marketing at AJ Bell.