The Lifetime Allowance brings plenty of challenges

  • Describe the challenges around the lifetime allowance
  • Describe what happens when the lifetime allowance is breached
  • List the ways to mitigate the breach of the lifetime allowance

Capped arrangements must be reviewed every three years if you are under age 75 and yearly after this - a service that providers will typically charge £150 to £250 for.

On the review date a new maximum income is calculated based on the revised fund size and prevailing GAD rates – and set for the next period.

You may have already moved your clients over to Flexi Access Drawdown (FAD) but if you still have clients in capped drawdown, it is worth looking again.

The key merit of staying in Capped Drawdown comes if a client’s circumstances have changed significantly and they want to put a good deal of new money into their pension having started drawing on it.

In this scenario, in Capped Drawdown you still have a full £40,000 Annual Allowance (AA) so you can pay that much each year into your income drawdown policy tax free. However, in FAD you are reduced to the much less generous £4,000 Money Purchase Annual Allowance (MPAA).

Annual Allowance has also fallen & been further reduced by tapered annual allowance

If you are a UK taxpayer, in the tax year 2018/19, you will get tax relief on pension contributions of up to 100 per cent of your earnings or a £40,000 annual allowance, whichever is lower.

This number was £50,000 until 2014-15. Increasing numbers of individuals are now exceeding their Annual Allowance.

HMRC numbers from September 2018 show that for the 2015/16 tax year, total annual allowance breaches cost UK taxpayers £179m. This jumped to £561m in 2016/17, in the year the tapered annual allowance for high earners came into effect.

While the government does not separate how much of the tax revenue came from high earners on a tapered threshold from revenue generated by the standard annual allowance, it suggests the taper rules brought in from April 2016 may have had a significant impact on the tax take.

The tapered annual allowance for high earners which means that high earners have less than £40,000 annual pensions contribution allowance (tapering down to a mere £10,000 with total earning levels). This calculation is so complicated that Sir Steve Webb has advocated ending the taper.

Time to reconsider annuities

Only about one in 10 DC pension holding retirees are currently buying annuities. Many advisers are still steering clients away from buying annuities post-Pension Freedoms, often because they think annuity rates are so poor. However, it is worth looking again.  

Recent data from Moneyfacts shows the average annual annuity income rose by between 1.4 per cent and 4.8 per cent in the first half of 2018.

So, it is up 14.6 per cent since the Brexit vote back in June 2016 and now sits just 1.2 per cent lower than when freedoms came in the year before that.