Despite the rumours in the run up to this year’s Budget around pension changes, including a possible attack on tax relief for higher earners, reductions in the annual allowance and restrictions on tax-free cash, it was ultimately the Lifetime Allowance that became the fall guy again.
What is the Lifetime Allowance (LTA)?
There is a restriction on the amount of pension savings which can be built up in a tax-favoured environment and this is where the LTA comes into play. A pension fund is tested against the LTA upon a Benefit Crystallisation Event (BCE), which can occur when the pension fund holder first draws benefits from the fund (say tax-free cash or an income). When this happens, the value of the fund is measured against the LTA and any excess over and above will face an additional tax charge. Another BCE will occur when the pension fund holder reaches 75 or on death.
The standard LTA was reduced from £1.25m to £1m in April 2016. Since then, increases have been linked to the Consumer Prices Index. This has resulted in the current level of £1,073,100, where it will remain for the next five years.
Further contributions and/or investment growth mean that this could affect individuals who had previously felt that they had sufficient scope to have no need for concern.
Are there any transitional protections to help me?
Reductions in the standard LTA have been accompanied with an opportunity for those who think they might be affected to apply for protection against the additional tax charge. The protection arrangements introduced as a result of the last reduction, known as Fixed Protection 2016 (FP2016) and Individual Protection 2016 (IP2016), are still available. Those who have yet to apply for either, or think that they might breach the standard LTA upon a BCE in the future, may wish to reconsider whether either is appropriate for them.
Anyone who is unsure of the implications or differences between the two, or how to apply should take advice from a suitably qualified individual.
Consultation on the underlying investment rules
On a more positive note, a consultation was announced regarding the rules on permissible investments for pension funds. The suggestion is that they are a potential source of capital for investment into new ventures, such as the development of infrastructure to help drive the economy forward. More detail will follow after consultation with the Financial Conduct Authority, but this could be really good news in terms of potential returns over the longer term.
If you would like to discuss pension related matters, please contact Michael Lapham.