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Kirk Rice Blog

Lifetime Allowance Changes – Your Options (Including Podcast)Written on January 28, 2016 by Peter Sharratt

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The Lifetime Allowance (LTA) is changing in April 2016 and there are some important changes.  In this blog we look at your options if not eligible for the LTA.

This blog provides a brief overview of your options if you are not eligible for the Lifetime Allowance or want to continue paying into a pension. There is a lot more detail that we cannot cover in this short article therefore if any issues affect you, contact us and we will be able to provide more specific guidance on your individual situation.


 

Listen to the audio version of this blog: 


 

Someone may find they are not eligible for Individual Protection 2016 but equally they do not want to opt for Fixed Protection 2016 even though they are at risk of exceeding the Lifetime Allowance.  The common reason will be that their employer pays into the Pension and they want these payments to continue.  In doing so though, there is a risk that within a short period their Pensions will exceed the revised Lifetime Allowance.  As an example, if we assume someone has a fund of £900,000 currently and their employer is investing £1,000pm, assuming a fairly modest 3% pa Growth Rate, the value would exceed £1m after 3 years.  In 7 years, the value would be £1.2 Million, meaning that £200,000 is subject to the LTA Tax Charge.

In our previous blog ‘Lifetime Allowance Changes – how do they affect me’, we mentioned that Pensions are tested against the LTA at the point they are taken.  In the above circumstances, an option to consider is to take some or all of the Pensions prior to 5 April.  This means they are tested against the current Lifetime Allowance.   To test them against the LTA, they need to take the Pension Commencement Lump Sum or Tax Free Lump Sum as it used to be called.  They do not have to take the Income but to do this, existing schemes may need to be transferred to a Flexi-Access Drawdown Pension.  This is a type of Pension which allows the Pension Commencement Lump Sum to be taken whilst leaving the balance invested to draw upon in future.

Sticking with our earlier example of a £900,000 Fund plus Contributions of £1,000 pm, the £900,000 could be taken now.  This would give a Pension Commencement Lump Sum Tax Free of £225,000.  This could be reinvested and so continue to benefit from investment growth.  The remaining £675,000 remains invested in a Pension.  This will be tested against the LTA again at age 75 but prior to then, there is the option to take withdrawals (income) to keep the value within the Lifetime Allowance.  Taking the Pension now uses £900,000 or 72% of the current £1.25m Lifetime Allowance.  This means there is 28% of the LTA remaining.  As from April, 28% of the revised Lifetime Allowance of £1M equates to £280,000.  The employer contributions of £1,000 pm could continue to be invested and after 7 years, again assuming a 3% growth rate the value accumulated would be £93,000; well within the remaining LTA of £280,000.  It’s also important to remember that the saver still has the £675,000 and any growth that has benefited from plus the Pension Commencement Lump Sum of £225,000 that could have been invested.

Clearly, deciding to take a Pension early and transferring is more involved than our brief summary.  Many other factors will have an influence on individual suitability so it is important to get advice.  Also, you have to be over the age of 55 to take a Pension although there can be rare instances where some Pensions can be taken from age 50.

What are the main points people need to consider?

  • Are you eligible for Individual protection 2014 – Pensions would need to have a value of over 1.25m as at the 5 April 2014.
  • If not, are you eligible for Individual Protection 2016?  Pensions need to have a value greater than £1m as at 5 April 2016.
  • Should you opt for Fixed Protection 2016? – even if your Pensions are over £1m this may be preferable to Individual Protection 2016 – you can apply for both if eligible.  Remember contributions MUST cease by the 5th April 2016.
  • Finally, taking some or all of your Pensions early may be an option but ensure you take appropriate professional advice before taking decision of this nature.

 

Would you like to learn more?  Read about our Pensions and Retirement Planning services.


 

If you would like more advice regarding this issue or any other financial services matter, please contact us.


 If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

The value of investments and income, if any, may go down and you may not get back the original amount invested.  Investment in smaller companies should be considered higher risk than is customarily associated with funds investing in larger, more established companies.  Sudden above average price movements and valuations can be expected.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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