The limitation of the Lifetime Allowance (LTA) has been attracting a great deal of negative market attention in the last few weeks, especially from Royal London’s director of policy Sir Steve Webb and AgeWage chief executive, Henry Tapper.
The provider’s recent study found that 290,000 pension savers approaching retirement have already breached the current £1.03m LTA level and many of them are still paying in.
Royal London found it was already catching a goodly number of long service public sector workers with DB pensions as well as lots in the private sector with salaries tending to range from £60,000 to £90,000. So, it’s already hitting the mass affluent, not just the top earners.
One of the problems is that the LTA has been one of the most volatile of a patchwork quilt of pensions tax changes which together are bound to increase advisers’ workload to find ways of keeping tax bills down.
Introduced back in 2006 with a £1.5m starting point, the LTA has been as high as £1.8m and as low as £1.0m, making planning difficult for advisers and clients alike. For next year (2019/20) it will be £1.055m. The additional tax charges on those exceeding the Lifetime Allowance now raise over £100m per year for HM Treasury.
HM Treasury’s take has increased by over 1000 per cent in just 12 years.
For those exceeding the limit it can apply in either of two ways or a combination of both depending on how the excess benefits are taken. The charge is: 25 per cent of any income taken, and 55 per cent if taken as a lump sum.
In the absence of scrapping the LTA (which many are calling for), employers and advisers may need to consider recommending long-term saving in Isas for younger people, at least in their first few years.
If you are going to run out of pensions allowance, it would be better to forego contributions relievable at 20 per cent when younger, than contributions relievable at 40 per cent when older. The LISA may be particularly attractive for younger people looking to save to buy their first home..
And what about older workers who have already saved close to their LTA limit when they join the company?
For the one in five retirement age people in the UK still working, many who stopped work and then un-retired later, employers may need to offer an income uplift or other employee benefits instead of an auto-enrolment pension which employers currently have to offer all staff.
Many older workers are already demanding money instead of pension contributions and this will become a bigger problem if LTA remains at current levels.
LTA aside, what else has changed and what other potential pension tax traps are out there for your clients?
MPAA has also taken a hammering
No new capped drawdown arrangements have been allowed since 6 April 2015. In these legacy arrangements, the amount you can take as income is capped at 150 per cent of the income a healthy person of the same age, based on GAD rates, could get from a lifetime annuity.