Proposed Pension Lifetime Allowance changes: Glasgow Wealth financial adviser Ian Brunton discusses the Lifetime Allowance and the latest proposed changes.
As chancellor Rishi Sunak wrestles with the significant task of how to reduce the government deficit, made substantially worse by the measures put in place through the Covid-19 pandemic, it seems clear that he sees pension savings as fair game.
What are the proposed changes?
Thousands of UK savers are already affected by the Lifetime Allowance tax charge. However, it is reported that the government are planning to cut the allowance from £1,073,100 to £800,000, meaning that many more UK pension savers would be affected.
These plans would mark the second change to the Lifetime Allowance in 2021. Since April 2018, the allowance was indexed to increase each year in line with inflation, or more specifically the increase in CPI. However, it was announced by chancellor Rishi Sunak in March 2021, that the Lifetime Allowance would be maintained at £1,073,100 until April 2026.
However, the further change which has been mooted, would be far more significant. The proposed level of £800,000 will affect a significantly larger number of pension savers.
How might you be affected?
If pension assets and entitlements are deemed to be in excess of the lifetime allowance when benefits are taken, then a tax charge will be levied on the surplus at 55% of the excess if taken as a lump-sum or 25% if taken as income (which will then also be taxed at marginal rates as income in addition when benefits are taken).
The tax charge can be triggered in a number of ways including:
• when you take income from your pension(s)
• taking lump-sums from your pension(s)
• transferring your pension overseas
• simply reaching age 75; even if you haven’t accessed your pension(s)
• on the event of your death
You may have inspected your pension assets recently and taken the view at the time that there was plenty of head-room before the tax would apply. However, with the possibility of a significant drop in the Lifetime Allowance to £800,000, additional attention may be warranted.
What can you do about it?
This of course depends on your circumstances. However, one of the first things to be aware of are the forms of Lifetime Allowance Protection available to protect savers affected by the changes to LTA for a limited amount of time.
• 2016 – Fixed Protection
If the value of your pension assets was below £1m at 5th April 2016, Fixed Protection 2016 will preserve a lifetime allowance of £1.25m for those who successfully apply for it. In order to maintain Fixed Protection 2016 all future pension contributions would have to cease and no future accrual would be permissible in defined benefit (final salary) schemes.
• 2016 – Individual Protection
For those with funds/ benefits in excess of £1m at 5th April 2016, the value at this date will be protected up to £1.25m. Future accrual and ongoing contributions may continue.
• Other Protection
There have also been other forms of protection including Individual Protection 2014, Fixed Protection 2014, Primary Protection & Enhanced Protection.
• Pension Funding
If pension funding is approaching the stage where the lifetime allowance is a threat to the tax-efficiency of your retirement plans, you may be able to consider funding plans on behalf of a spouse or child as an alternative.
Caution should be exercised if previous steps have been taken to address the lifetime allowance in the past. For example, primary or enhanced protection.
It is important to note that any cut in the Lifetime Allowance has not been confirmed at this stage. Also, if there is a drop in LTA to £800,000, the government may introduce a new form of LTA Protection.
If you need advice?
If you believe that you may be affected by the lifetime allowance and would like further advice on how best to approach the subject, please get in touch for a confidential consultation.
Broadly speaking, if your pension assets are valued in excess of £500,000 or you are aggressively funding your pension there may be a realistic prospect that you may be affected by this issue during your lifetime even after benefits have been taken initially. With a headline tax rate of 55%, financial planning advice will be worthwhile.