The Level of the Lifetime Allowance
We are all becoming very aware of just how difficult it is becoming to build a amount of reasonable pension capital under this government. The level of the lifetime allowance is now being continually revised downwards making it very difficult to plan properly for retirement.
The Government originally announced the level of the Lifetime Allowance (LTA) for five years. Future amounts were to be issued by HM Treasury order and were supposed to increase in line with the retail prices index, rounded up to the nearest £10,000.
However, as we have now come to realise, as part of the Government’s measures to restrict pensions tax relief from the 2010 interim budget, the LTA was reduced to £1.5m from 6th April 2012. In the December 2012 statement the Chancellor announced a further reduction to £1.25m from 2014/15 which still remains in place. However, there is to be an even deeper cut in the LTA from the tax year 2016/17 to £1m.
Your lifetime allowance is calculated by taking the total values of all of your pension plans, typically UK registered schemes including money purchase or defined contribution and any company or statutory pension schemes whether defined contribution or defined benefit (final salary).
Whilst you may not feel that you are yet close to these limits you should take care that decent investment growth and compound interest do not catch you out. There are some basic checks and protections that you should consider to ensure that you are not caught out in this way.
- For money purchase (defined contribution) plans you take the full values of any plans
- For final salary (defined benefit) schemes you multiply the expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension.
Bearing all of this in mind, you should take into account all of the values of all of your schemes and investigate whether protecting the value is appropriate.
Move quickly with pre-Budget planning
Sadly, there are other issues surrounding accumulating pension funds for retirement. The Government also suggested that they reduce the amount of tax relief available on pension contributions for those earning more than £150,000 per annum to fund other commitments.
It is therefore likely that there will be an announcement on 8th July when the Conservatives have their first Budget since being elected with a majority. This will in all likelihood mean further reductions to the tax advantages of saving via a pension for those earning above the £150,000 level.
There are some quick actions that can be taken, and by quick I mean right now really, ahead of any announcement on the 8th July.
- Utilising the current year Annual Allowance: As it stands, the annual allowance is currently £40,000. For individuals with readily realisable funds, planning to utilise their annual allowance this year, it seems prudent to do so in advance of the Budget on 8 July. Whilst there can be no guarantee, it would be surprising if any reduction to the annual allowance for high earners applied to contributions already made.
- Funding next year’s pension contribution, this year: The eccentricities of pension legislation mean that it is possible with planning to utilise next years’ annual allowance, this year. This is predicated on the assumption that any potential change would not be retrospective or be applied to contributions already made. In doing so, higher earners could receive up to £13,500 in tax relief that would otherwise be lost if the rules are changed.
- Utilising unused Annual Allowance from previous years: Where individuals haven’t utilised all of their annual allowance in recent years, it may be possible to carry forward any unused allowance from the previous three tax years which could be as much as £140,000. Whilst details of potential changes to the annual allowance are unclear, it makes sense to do so sooner rather than later.
- Taking a pay cut. This is called ‘salary sacrifice’ and involves an employee giving up earnings in return for an equivalent pension contribution, paid by their employer. Prior to the Budget, there may be scope for some individual to restructure how they are remunerated, which could potentially protect against legislative change. Someone earning £175,000, with available annual allowance could ‘sacrifice’ earnings of £25,000 and potentially avoid annual allowance restrictions entirely.
Whilst this can all appear a little complicated we would suggest that should you need further help that you contact us or call us on 0207 337 1390, we would be happy to help.
Lee Robertson, CEO
Lee is a Chartered Wealth Manager and is listed in the definitive Spears Wealth Management Index as one of the UK’s top 10 wealth managers. He is a regular contributor to the financial press and is often on television discussing wealth management and investment issues.
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