Although prior to the Autumn Budget we had heard a Treasury representative indicate that indexation of the lifetime allowance would go ahead from April 2018, it was good to see this confirmed in the Budget Red Book.
There had been speculation that there might be scope to reverse the indexation and reduce it to perhaps £900,000, a figure many still deem as more than ample to provide an income on which to live. Indeed, withdrawals of 3% per annum, considered by many to be a “safe” level of withdrawal, would provide for an income roughly equal to the current national average annual wage of £26,468.
What was also good to see was that this was the only meaningful mention of pensions in the Budget, giving us only the second year in nine where we have not had a change in the annual or lifetime allowance.
So, is it a sign that this government recognises the industry’s protestations that short-term meddling around the edges of pension legislation is itself damaging to long-term savings and that it is at an end? Or, is this the calm before the storm, which might be expected once larger matters at hand are put to bed?
In the meantime, let us enjoy the first upward movement of the lifetime allowance since 2011.
According to Aegon’s recent research, the average pension pot in the UK is a little under £50,000. Therefore, the increase of £30,000 to £1,030,000 is likely to have little impact on the vast majority of savers. One would think that a 3% increase would be small fry to someone whose fund is at a level where the increase in the lifetime allowance would have an impact, but every little helps, and clients will be looking for advisers to eke out even small advantages for them.
Timing is everything
It is therefore important that advisers and paraplanners are aware of this increase in the lifetime allowance, as timing of benefits could prove crucial in managing clients’ tax affairs, particularly for clients phasing vestings as part of an income strategy in the decumulation stage.
The increase has been calculated in line with the change in Consumer Prices Index (CPI) over the 12-month period between September 2016 and September 2017. This figure is then rounded up if necessary to the next £100 and for this period was 3%.
Although not a large increase, it could result in tax savings for some clients who are or might be close to the current lifetime allowance of £1,000,000.
At a vesting, the value of benefits taken is tested against the lifetime allowance and is expressed as a percentage of the allowance in force at the date of vesting. Individuals who decide to delay drawing benefits until after 5 April 2018 will, therefore, use a smaller percentage of their allowance, giving themselves additional scope and possibly reducing any charge they have to pay.
For example, a client with a fund of £900,000 who vests benefits on 31 March 2018 will use up 90% of their lifetime allowance (unless they have some form of lifetime allowance protection in place).
If instead, they draw the same benefits on 6 April 2018, it will represent only 87.37% of their lifetime allowance.
Advisers and paraplanners should be aware of these increases as timing of benefits could prove crucial in managing clients’ tax charges. There are other situations where this relatively modest increase could result in a tax saving of more than £16,000.
For example, where a client has a pension fund in excess of the new lifetime allowance, say £1,060,000 but has no protection in place and fully vests their benefits before 6 April 2018, the lifetime allowance charge on the excess, if taken as a lump sum, would be £33,000 (i.e. £60,000 taxed at 55%).
However, if the client defers their vesting until on or after 6 April, the lifetime allowance charge on the excess, if taken as a lump sum, reduces to £16,500 (i.e. £30,000 taxed at 55%).
Martin Tilley is director of technical services at Dentons Pensions Management