Will pension be caught by lifetime limit?

I am a 55-year-old dentist, accumulating money in my final-salary pension fund and have heard that the government cap on pension funds may also be affected by death-in-service benefits. Can you explain what this means for someone in my position and whether there is any way I can avoid being hit with 55 per cent tax charge on anything over the cap?

David Dale, head of wealth management at Dickinson Dees law firm says death in service benefits that NHS employees are entitled to through their pension scheme have been a hot topic in recent months.

The "government cap", otherwise known as the Lifetime Allowance (LTA) will decrease from £1.8m to £1.5m with effect from April 6. However, you can elect for "fixed protection" with HM Revenue & Customs, in which case your pension benefits will continue to be assessed against the higher LTA of £1.8m. Caution should be exercised with "fixed protection", however, because you cannot start a new arrangement and you will be subject to restrictions on where and how you can transfer benefits.

When you retire, your total pension benefits - including any private pension provisions - will be assessed. For the NHS pension scheme, which you will be entitled to as a dentist, the value of your pension will be multiplied by a factor of 20, and your cash lump sum entitlement will be added to this figure. Should this final sum be greater than the LTA you are more than likely to incur a tax charge on any benefits in excess of the limit.

Now, the issue you mention in your question - that of death-in-service benefits is the one thing many people don't include in their calculations. Most final-salary schemes, such as your NHS scheme, will provide for a lump sum benefit, similar to a life assurance policy. This is likely to be a payment equivalent to twice your average uprated earnings. There will also be a pension payment to your spouse, civil partner, or children.

If you die before the age of 75 and the lump sum death benefit is paid within two years of the reported death, this can generally be paid without being included in an inheritance tax assessment - if it is paid to your spouse or civil partner.

If the lump sum death benefit exceeds your LTA, any amount that is above the cap will be taxed at 55 per cent. To put this into context, if your earnings are, say, £80,000 a year, the payment from death in service benefits would be £160,000. This equates to 10.7 per cent of the reduced £1.6m allowable under the new LTA. In your case, there would be little risk of a LTA charge applying unless you have sizeable pension funds elsewhere.

Can a pre-nup protect our assets?

My fiancee and I are due to marry next summer in London after cohabiting for five years. We both work and have independent finances. We are considering signing a prenuptial agreement to protect our individual assets. But are prenuptial agreements actually legally binding in the UK? If we decide not to get a pre-nup and the marriage did break down is there a way to protect our finances at a later stage?

Sarah Higgins, a partner and head of the family group at Charles Russell LLP, says that following the "Radmacher" supreme court case last year, the status of prenuptial agreements has been enhanced.

The point of an agreement is to set out how your finances will be dealt with by a court in the unfortunate event of a divorce. In English law, prenuptial agreements are not absolutely binding in that one spouse cannot prevent the other from asking a court to look beyond the agreement.

To maximise your chances of having an effective prenuptial agreement you should show that you have both entered the agreement freely and willingly with a full understanding of the implications.

You should leave plenty of time before the wedding to instruct a solicitor, have the agreement drafted, negotiated and finalised. It should be signed at least 21 days before the ceremony but you have plenty of time. You should both give full disclosure to establish what your premarital assets are.

You will need to consider any financial provision that will need to be made for the other in the event of a divorce. The provision may be different depending on when the divorce takes place - for example, you may both think it is fair to have more generous provision after 30 years and four children than after two years and no children.

You can also enter into a postnuptial agreement. The advantage of doing this is that you avoid the issue of pressure, and later down the line your situation may be clearer, making it easier to agree what would be fair provision. The difficulty of course is that after marriage your fiancee may not wish to enter into an agreement, and you have lost the "lever" of declining to go ahead with the wedding.

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