The Lifetime Allowance: How Low is Too Low?

In March, the Lifetime Allowance (LTA) was cut once again by Chancellor George Osbourne. He has also claimed that by 2018 the LTA will be indexed-linked, adjusting with inflation.[1] The amount of tax-free savings an individual can have in their pension fund upon retirement has been reduced from £1.25 million, for the tax year 2015/16, to £1 million, for the year 2016/17.[2] Any pension savings exceeding the £1 million LTA will be taxed at a rate of 55% on anything taken as a lump sum and at 25% if the excess is taken as an income (such as a scheme pension or annuity).[3]

Given the pressure that Osborne is under to reduce the deficit, it is perhaps reasonable that he would choose to cut the LTA; after all, the cut will save the Treasury around £600 million a year.[4] And there is good reason for the existence of LTA. The Government uses the promise of tax-free pension savings to incentivise the UK to save money for retirement – once no longer earning, they will not be dependent on the state. And, arguably, there can be little point in offering tax relief to pensioners beyond the level required for fairly basic living. This would be a luxury the state cannot afford; more relief simply means greater deficit.

When commenting on the recent cut, Osborne said that the limit for the LTA is so high that, “Fewer than 4% of pension savers currently approaching retirement will be affected”.[5] However, whilst that maybe true for soon-to-be pensioners, the rest of the UK may be less fortunate. As the Pension Advisory Service rightly points out, pensions are a long-term commitment and what may seem a modest accumulation of savings to start with may exceed the LTA by the time benefits are drawn.[6] Furthermore, the LTA applies to total pension savings - anyone who has had more than one job, and consequently more than one pension scheme, should keep this in mind.

The LTA cut will disproportionately affect those with a defined contribution (DC) pension scheme compared to those with a defined benefit (DB) scheme. Typically, those working in the public sector will have a DB scheme; this type of scheme is far easier to monitor, meaning you can stop contributing to or draw from your pension scheme before you hit the LTA limit. However, if you work in the private sector, you are likely to have a DC scheme. Should the investments made by your pension provider be successful and you pension exceeds £1 million, you could be penalised with a 55% tax rate. Although one can monitor how much is contributed to a DC scheme, it is impossible to know how much that pension will ultimately be worth. Thus, the investor pays the cost of poorly performing investments but risks just as much with investments that are successful. £1 million may seem like a vast amount of money but is reasonably easy to achieve. So, the LTA may affect a far higher percentage of the population than just the very richest amongst us.

It is possible that even the most modest savers could hit the LTA if their investments perform well over their lifetime. Consequently many savers will be discouraged from saving, which would risk them being dependant on the state for part or all of their retirement (the problem being further compounded by an ageing population). The £1 million LTA seems low, particularly since the annual allowance is already in place to limit tax relief on pensions. Achieving the right balance between an LTA that helps to reduce the deficit by taxing only those with the largest pension funds, and one that is so low it discourages people from contributing to pension funds altogether, is a challenge. Hopefully, if the LTA is indeed indexed in 2018, this will protect pension savers from an ever decreasing LTA (the new LTA is just 66% of the £1.8m LTA for 2011/12).[7] But in the meantime, everyone, however close to retirement, should keep a close eye on their pension fund.

Mark Howlett
CEO

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstone.co.uk

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[1] Pensions Advisory Service, Lifetime Allowance Spotlight April 2015.

[2] Pensions Advisory Service, Lifetime Allowance Spotlight April 2015.

[3] Pensions Advisory Service, Lifetime Allowance Spotlight April 2015.

[4] http://www.theactuary.com/news/2015/03/lifetime-allowance-reduced-to-1million-says-chancellor/

[5] http://www.theactuary.com/news/2015/03/lifetime-allowance-reduced-to-1million-says-chancellor/

[6] Pensions Advisory Service.

[7] http://www.telegraph.co.uk/finance/personalfinance/pensions/11543227/The-death-of-pensions-has-it-begun.html

LTA! - Come on in your time is up

Rarely has such a concept become an anachronism so quickly. The Lifetime Allowance was introduced at £1.5m in 2006 and rose to the heady heights of £1.8m by 2010. It has since been pegged back and back to its new low of £1.25m. However, it is time for it to go. I am not living in complete naivety and understand that when it bites it is a revenue earner for the Treasury but a tax system should be fair and people should not penalised for saving into a pension.

 

Reasons why it should go:

 

1.   The Annual Allowance (the “input test” little brother to the Lifetime Allowance “output test”) is also at an all time low of £40,000. This level already restricts the tax efficient accrual in DB schemes (actually disproportionately afflicting those in the public sector) and also restricts the levels that the wealthy can attract tax relief therefore a second tax charge via the LTA is not required.

 

2.   The next government (however it is constructed) will be sure to introduce a flat rate of tax relief for pension contributions. The purpose of the LTA tax charge is to reclaim excessive tax relief during the accumulation phase if tax relief is say 30% there is no longer a need to recover excess tax relief.

 

3.   The unfairness in the system means that DC members are actually hit the hardest when taking benefits as there is a very good argument that DB benefits are given an unfair value. For example a £40k pa annuity would cost c£1.2m against a £40k pa DB pension worth (for LTA purposes) £800k. The LTA system is biased in favour of Public Sector schemes.

 

4.   It can be pretty complicated – protections and restrictions make it very difficult for joe public to understand – if we want to simplify the system as much as possible removing the Lifetime Allowance helps us move towards that goal.

 

5.   It stifles prudent saving into a pension and good investment performance. Having an upper limit, as well as an income limit, has forced individuals to either leave a scheme or begrudge the investment returns that takes them above their given threshold and attract tax charges.

 

Potential Issues if it is removed:

 

1.   It would be seen as a tax-cut for fat cats – albeit old fat cats. This is presentation matter and while some will regard it as such provided the “input test” is as punitive as it is now this already provides the brakes on wanton tax avoidance for younger fat-cats.

 

2.   What would you do to those that opted out of a scheme to protect what they’d earned, they might feel hard done by for the lost years of pension saving but they may be able to restart and they should benefit with carry forward for the lost years, a simple solution for those affected.

 

So as we approach the exciting time of the party conferences and the “pre-manifesto manifestos” shadow pensions ministers (and the real one) should take a progressive view and pledge to remove the pointless Lifetime Allowance.

 

David Brooks

Pensions Consultant

 

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk

What a relief - Retirement and Legacy Planning

One thing we have gleaned lately is that when the Pensions Minister believes change is needed - he makes it happen.

Following the surprise pension announcements in the 2014 budget, which no one saw coming, Steve Webb’s comments about introducing a single tax relief rate possibly carry more weight than before.

Could this be the right time for him to deliver his swansong by creating a single 30% pension contribution tax relief rate?

While the Government is in its “run-up-to-election strategy” and there being little, or no, new legislation on the books perhaps this is the right time for him to strike?

And if he were to include in this the Chancellor’s inference that the 55% pension death benefit tax should be reduced as it is “inappropriate in most cases” - things really come alive!

And if we add to this Mr Webb’s preference for scrapping the lifetime allowance could he possibly be preparing to deal the final ”Ace-in-the-pack” of radical pension reform; bringing the hurdy-gurdy of Pensions Simplification to a close?

Whatever Steve Webb’s final thoughts, one thing for certain is that pension legislation will not stand still and retirement planning and legacy considerations will continue to change and evolve.

Whichever way he goes there will always be winners and losers – after all, the glass is either half full or half empty – but one thing is clear the need for retirement and legacy planning advice has never been greater.

Helen Wilson

Consultant

Telephone:  +44 (0)20 7893 3456

Email:  getintouch[@]broadstoneltd.co.uk

  

Pension Auto-Enrolment - Non-Executive Directors Beware!

Only this week we have had a number of discussions with clients, who hold non-executive directorships, who were unaware that by automatically becoming a member of a pension scheme they could seriously affect their own pension arrangements.

This is because of the roll-out of auto-enrolment pensions (a new law requiring every employer to automatically enrol workers into a workplace pension scheme).

We are therefore advising all of our clients who have substantial pension benefits, protected lifetime allowances (the maximum you are permitted to have in pension assets by value without a future tax charge) and have one or more Non-Executive Directorship (NED) roles to check this out with their respective payroll departments.  This is to ensure they are not automatically enrolled in a pension scheme.

There are exemptions in place that are likely to cover most NEDs, however our concern is whether our clients, and the companies they are working with, are aware of these exemptions.  If they are not, there is a chance they could inadvertently become members of a pension scheme.

For clients who have protected lifetime allowances (potentially uncapped), being auto-enrolled could result in the loss of this protection and a reduced lifetime allowance of £1.25m.  In monetary terms this could easily lead to a six figure future tax charge!

Please do give us a call if you are a NED and please click on the link below if you would like to learn more on this and other planning ideas to consider before 5 April 2014.

Click here for 10 Planning Ideas to do before 5 April 2014.

Antony Summers
Private Client Partner

Telephone: +44 (0)20 7893 3456
Email:  getintouch [at] broadstoneltd.co.uk