Continual tinkering with the lifetime allowance (LTA) in recent years means more and more clients now have pension funds taking them over the limit.
If your client would prefer to transfer defined benefits (DB) which would otherwise remain within the LTA limits, to money purchase funds which will lead to LTA excess charges, is this a deal breaker?
Should the aim be to avoid LTA excess charges at all costs?
Case study - Bevan
Mr Bevan, a widower with non-dependant children, is about to reach age 70 when he wants to fully retire. He hasn’t taken any of his private pensions yet and has the full standard LTA available.
Mr Bevan’s pensions are:
Scheme Type | Current Value/ CETV | Full Pension | Max PCLS | Reduced Pension |
Scheme A = DB | £800,000 | £32,000 | £155,675 | £23,351 |
Scheme B = DB | £450,000 | £15,000 | £64,285 | £9,643 |
Scheme C = DC with GARs at age 75 | £90,000 | n/a | n/a | n/a |
Scheme D = DC former rebate only plan | £8,000 | n/a | n/a | n/a |
Source: Prudential
Hearing that these particular DB schemes will only pay a lump sum equivalent to five years of pension income on his death, Mr Bevan is keen to transfer his defined benefits to flexi-access drawdown as he knows this will allow remaining funds to be passed onto his beneficiaries.
If he takes benefits directly from the DB schemes there is no LTA excess. However, the transfer value amounts will lead to LTA excess charges at some point.
There is no way to avoid the charge when benefits are tested and exceed the LTA, at the latest when Mr Bevan reaches age 75. To transfer or not to transfer, this is the dilemma.
What is important to the client?
We don’t have space for a full analysis of defined benefit transfer considerations here but all the usual factors need to be taken into account.
Both the Financial Conduct Authority (FCA) Policy Statement 18/6 and Consultation Paper 18/7 are key to the current rules, with a further policy statement expected in Autumn to watch out for.
What we will look at is, does your client value a secure income, and dependant’s pension over a flexi-access drawdown income pot? Is your client prepared to take a hit on an LTA charge if you can demonstrate how it fits in with their desired outcome?
Options for scheme A
There are three, possibly four, scenarios for taking benefits from this scheme. Let’s work out how much LTA each scenario would use.
1. Leave in DB and take full pension. £32,000 x 20 = £640,000 LTA, using 2018 to 2019 rates this is 62.13 per cent.
2. Leave in DB scheme and take maximum PCLS and reduced pension. (£23,351 x 20) + £155,675 = £622,695 LTA, 60.45 per cent.
3. Transfer from DB to DC. £800,000 LTA, 77.66 per cent.
