It’s hard to believe the pensions lifetime allowance has been with us for almost 12 years. Introduced as part of pensions simplification, it has been controversial from the start, inciting many disagreements about how many people it actually affects versus how many the government believes it affects.
Its history is well known. Following a steady (pre-scripted) rise to £1.8m in 2010, it has been cut by subsequent governments to £1.5m, then £1.25m, and is now worth £1m.
But next April something strange is happening. The lifetime allowance is going up once more, although admittedly only by a smidge – the 3 per cent rise in the consumer prices index (CPI) measure of inflation, to £1,030,000 from April 2018.
This may sound like a footnote in pensions tax rules; something not worth taking note of. But that may be a mistake. A small change in the lifetime allowance could have big implications for pension scheme members.
|Let me introduce Tommy …
Tommy has pension benefits of £1,100,000, but he has no lifetime allowance protection.
If he took his benefits in March 2018, he would have a £100,000 excess over the lifetime allowance. If he took the excess as a lump sum he would pay 55 per cent tax = £55,000.
However, by delaying taking benefits until April 2018 when the lifetime allowance is £1,030,000, the excess falls to £70,000 and the tax falls to £38,500, saving him £16,500 tax.
A saving of £16,500 is a substantial amount, especially if it means only delaying taking benefits by just a few weeks. So it would be premature to dismiss this tweak out of hand, and instead advisers should work with their clients to intertwine it into their financial planning.
In theory, this should only be the start of the rise of the lifetime allowance. 2018 isn’t a one-off, as the lifetime allowance is legislated to rise by CPI for every year thereafter. Again, the increases may only be small, but to some they will represent big tax savings.
But before we start hanging out the bunting, we have the Autumn Budget on 22 November to navigate. Rumours abound (as usual) that the Chancellor will make changes to the tax rules for pensions.
And (as usual) these vary from wholesale changes to pensions tax relief, such as making it age-related, to tweaks to the lifetime and annual allowances. It’s not impossible the Chancellor could announce a reduction in the lifetime allowance effective from next April that would trump the current planned increase.
I would like to see the removal of the lifetime allowance altogether, especially for defined contribution members. There are already three annual allowances controlling contributions going in: the £40,000 limit, the money purchase annual allowance of £4,000, and the tapered annual allowance of £10,000. There is no need for a lifetime allowance as well. It only penalises good investment.
To remove it – and the acres of detailed and convoluted guidance and legislation surrounding transitional protection and benefit crystallisation events (BCEs) – would simplify pensions immensely. It would also send out the right message, which is that pensions are simple. People should be able to save as much as they can and benefit from the contribution tax reliefs available.