Pensions & Tax - The Lifetime Allowance

While the Chancellor of the Exchequer, Philip Hammond, made little reference to pensions in the 2017 Autumn Budget, the anticipated increase in lifetime allowance was confirmed.

There were fears that pensions tax relief would be targeted for change, however it will remain fixed at ￡40,000 and the pension’s tax relief for the tapered annual allowance will remain for individuals with income over ￡150,000, including pension contributions.

As outlined in the budget, the lifetime allowance is due to rise in line with inflation from ￡1,000,000 to ￡1,030,000 in April 2018.

The lifetime allowance is the maximum total amount you can draw from pensions during lifetime without incurring extra tax charges. If the allowance is exceeded, any excess taken will be taxed at 25% if taken as income, or at a rate of 55% if taken as a lump sum.

Although the increase of ￡30,000 doesn’t appear to be large, for clients with sizeable pension savings, it does create new opportunities to reduce tax. Retirement Advantage technical director Andrew Tully notes that there are some scenarios in which the seemingly small increase in lifetime allowance could in fact generate a tax saving of more than ￡16,000 for clients.

For example, if a client has a ￡1,100,000 pension pot with no lifetime allowance protection and fully crystallises their benefits on the 1st February, the excess of ￡100,000 would be taxed at 55% if taken as a lump sum. However, if the client does not take their benefits until the start of the following tax year in April 2018, when the lifetime allowance has risen to ￡1,030,000, the tax on the excess is only ￡38,500, which is a saving of ￡16,500.

Tully says: “While the increase to the lifetime allowance seems small, it still provides planning opportunities. Delaying taking some or all benefits until after April may help advisers reduce or eliminate the tax charge which faces people with larger pension pots.”

Our Webinar will discuss and explain the lifetime allowance in further detail and what your clients may be able to plan in order to reduce its impact such as whether QROPS are an option for clients with lifetime allowance issues and large pensions.

In addition to the above, our experts will explore the difference between death in service and pension death benefits, and how you can help your clients plan with them. The importance of a correctly worded contingent nomination will be covered, including the benefits and flexibility this can provide to your client and their beneficiaries.