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Don't fear the lifetime allowance: Tilney

Don't fear the lifetime allowance: Tilney

The lifetime allowance of £1m may be an "unwanted beast", but it should not deter people from contributing to a pension, according to Tilney Bestinvest.

Gary Smith, financial planner with Tilney, said there are a number of common myths about the lifetime allowance that lead people to make poor decisions.

These myths include that the entire pension will be charged, rather than just the that over £1m; and that if you exceed the lifetime allowance you will attract the tax immediately.

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In reality, he said, you will only attract the tax when benefits are crystallised.

Another myth was that the charge is only made once. In fact, he said if the pension pot exceeds £1m, is partially crystallised, and the remaining amount grows to above £1m again, then another charge is applicable.

Mr Smith's comments came two weeks ahead of chancellor Philip Hammond's first Autumn Statement. Many in the industry are hoping he will lift the lifetime allowance.

But Mr Smith said, if this does not happen, it is not the end of the world.

“The Lifetime Allowance is not all bad news. Whilst it is no doubt an unwanted beast, it should not be feared as much as to deter an individual from pension saving," he said.

 He stressed that the charge could be controlled somewhat.

“For example first and foremost, it is the decision of the pension member as to whether a 55 per cent charge or a 25 per cent charge is applied," he said. 

"If the individual is a basic rate taxpayer, it may be pertinent to take an income from the excess above the lifetime allowance as the total tax / charge will likely be less than 55 per cent." 

Conversely, he said additional rate taxpayers may be advised to take the lump sum and suffer the immediate 55 per cent charge.

Another trick, he said, was to crystallise the pension up to the lifetime allowance and leave the funds there until age 75 or death, "whichever comes first",  ensuring only one lifetime allowance charge is payable.

Alternatively, he said retirees could crystallise the pension fund before reaching the £1m by taking their entire tax free cash entitlement.

"Any growth thereafter in the value of the drawdown fund could be drawn as an income ensuring that simply the initial amount moved to drawdown (£750,000) is left at either age 75 or death." 

As a result, he said the lifetime allowance would never be breached.

james.fernyhough@ft.com