The autumn budget was notable in that the word “pension” was not mentioned at all and so it was necessary to trawl through the associated documents released to see if chancellor Philip Hammond had said anything of note.
One such document confirmed that the pensions lifetime allowance (LTA) would increase in line with Consumer Prices Index (CPI) (rounded) to £1,055,000 for the tax year 2019-20.
This is only the second time the lifetime allowance has increased, other than when mandated to do so under the pension simplification legislation of 2006. The graph below charts its progress since introduction but it is interesting to note that had the LTA increased in line with CPI (as it now does) from its introduction, it would have risen to a figure of £2,002,000 for the tax year 2019-20 – some 90% higher than it will actually be.
If inflation continues at the current rate of 2.2% (Sept 2017-Sept 2018) it will take another eight years before the LTA exceeds the £1.25million threshold needed to make Fixed Protection 2016 redundant.
Aside of the statistics, what impact will this have on someone looking to retire before or after the April 2019 implementation date?
Let us take Boris as an example. Boris has a defined benefit scheme entitlement, which he can draw on from early 2019. It offers a pension commencement lump sum (PCLS) of £100,000 and residual pension of £42,000 per annum. Converting this to an equivalent capital sum to test against the lifetime allowance requires the multiplication of his residual pension by a factor of 20, then adding on the separate lump sum. In this instance the capital value of the benefits coming into payment are £940,000. He also has a personal pension valued at £114,995.
If Boris elects to draw on his defined benefit scheme before the 5 April 2019, he will use up 91.26% of LTA. If he then draws upon his personal pension scheme in full post 5 April 2019, he will have an available LTA of £93,262 being 8.84% of the new LTA.
His PCLS would be limited to 25% of this figure (£23,315.50) and an LTA charge would apply on any excess drawn above his LTA limit. In this case conversely, if Boris defers his defined benefit vesting until post 5 April 2019, he will crystallise only 89.10% of LTA leaving him an available 10.90% of the LTA, which equates to £114,995 enabling the whole of his personal pension to crystallise without breaching his LTA.
His PCLS would be the full 25% of his personal pension (£28,748.75) giving him an extra £5,433.25.
Admittedly, against this would need to be offset the net sum remaining after payment of the LTA charge on the excess under the pre April 2019 vested route.
Therefore, in the majority of instances the increased LTA is a positive step. Albeit making only a marginal improvement over the current LTA levels.
However, there is one instance where the increase in the LTA can have a negative impact on a client’s deferred benefits and this is where an individual holds a pre-2006 scheme specific protected pension commencement lump sum.
The revaluation of this lump sum is in two parts with the post 2006 increases based upon the growth in the fund adjusted for any change in the lifetime allowance from the 2006 base figure of £1.5million. Strangely, the formula dictates that as the ratio of the current LTA becomes a greater proportion of the base £1.5million, it has the effect of reducing the pension commencement lump sum. Again, whilst the effect is marginal it is worthy of consideration for clients in this rare position.
David Fox is director of sales & marketing at Dentons Pension Management