The removal of the lifetime allowance means that individuals can save into their pensions without the concern of a tax charge should they breach the limit.
Under current rules there are a number of occasions when a pension is tested against the LTA. These are primarily tests at the point of 'crystallisation' when pension benefits are drawn.
In addition to this, there was a test at age 75 that could often require a great deal of planning for clients with defined contribution arrangements, primarily when their pension fund values were nearing or breaching the LTA.
The age 75 tests generally involved testing the value of any uncrystallised funds and testing the growth of any funds previously designated to drawdown against the client’s remaining LTA. Any excess could result in a charge.
Historically, when clients had a pension fund nearing or breaching the LTA, as the age 75 test approached there were various discussions surrounding the options to mitigate the tax charge and discussing possible solutions, such as withdrawing excess funds versus the alternative of paying the excess charge.
There is likely to be a potential impact to employers and the way in which they see employees now manage their contributions.When speaking with clients, the conversation often focuses on helping them understand pension planning and trying to discuss the complex rules of taxation, annual allowance charges and LTA charges in a simplified manner.
Abolishing the LTA provides much needed simplification to pensions, making them more understandable to the wider public. It will have a wide-ranging impact and ramifications across the financial planning journey, and in terms of importance is reminiscent of the pension freedoms announcement back in 2014.
For example, this change in legislation provides increased flexibility to those individuals who were previously locked into fixed protection and therefore unable to make further pension contributions without losing the protection of a higher secured LTA.
Following this announcement there is likely to be a potential impact to employers and the way in which they see some employees now manage their pension contributions. With the increase of the annual allowance, higher tapered threshold in combination with the abolition of the LTA means higher earners may now have wider options and may choose to increase their contributions and potentially take advantage of any facility for employers to match or increase their contributions in turn.
I often meet with clients who are directors of limited companies and discuss options to invest tax efficiently in order to mitigate a corporation tax liability.
Going forward there will certainly be wider financial planning options.A director of a limited company can potentially pay into their pension via the company and, in addition to this, the company can contribute on behalf of its employees. Employer contributions are deducted from the company’s total profits and are therefore generally a business expense, enabling tax relief against corporation tax.
The increase to the annual allowance provides added benefit to this as employer contributions are not limited to the individual’s relevant UK earnings and can therefore be a highly tax efficient way of investing (providing it meets HMRC’s ‘wholly and exclusively’ test).
The change in pension legislation now makes such contributions even more favourable.
Going forward there will certainly be wider financial planning options. Pensions have always formed a crucial role in inheritance tax planning due to them generally being outside of the estate for IHT.
This will become even more prevalent with the removal of the LTA limit and offer wider opportunity for investment with increased IHT planning opportunities.
Alice Shaw is a wealth planner at Succession Wealth
