Could you be caught out by the reduction to the lifetime allowance?

11 June 2015
 

In the last Budget of the Coalition Government the Chancellor announced a further reduction in the pensions ‘lifetime allowance’ (LTA), the value an individual can accumulate in their pension pots over and above which a 55% tax charge will apply when benefits are taken, from 6th April 2016. This reduction will see the LTA reduce to £1m from the current £1.25m and will ultimately result in the LTA having been reduced by 40% since its peak level of £1.8m during 2011.

While a £1m pension pot may seem a distant prospect, figures from Tilney Bestinvest show that even without investing a further penny, many savers who are in the middle of their working lives could in fact be on track to breach the LTA without realising it.

Based on the lifetime allowance increasing annually by 2% from April 2018 (the Chancellor has announced that the LTA will be inflation-adjusted from this date, so we have used the Bank of England's target rate) and an annual investment return net of costs attained of 5%*, the following pension pots for investors of different ages could breach the LTA. These figures assume that no further contributions are made:

Table 1:

 

Current Pension Assets held which might breach adjusted Lifetime Allowance

Current Age

By age 55

By age 60

By age 65

30

£480,000

£415,000

£360,000

35

£555,000

£480,000

£415,000

40

£641,000

£555,000

£480,000

45

£741,000

£641,000

£555,000

50

£857,000

£741,000

£641,000

55

N/A

£857,000

£741,000

e.g. A 30 year old could breach the Lifetime Allowance by if they currently have £480,000 in their pension pot by the time they are age 55.

Assuming the above, and that a monthly pension contribution of £250 is made, the following levels of assets could potentially breach the LTA:

Table 2:

 

Current Pension Assets held which might breach adjusted Lifetime Allowance

Current Age

By age 55

By age 60

By age 65

30

£436,000

£367,000

£308,000

35

£517,000

£436,000

£367,000

40

£610,000

£517,000

£436,000

45

£718,500

£610,000

£517,000

50

£845,000

£718,500

£610,000

55

N/A

£845,000

£718,500

 

David Smith, Financial Planning Director at Tilney Bestinvest said: “Tax relief of pension contributions is rationed on the way in - and about to be cut back even further for high earners - and when you take pension benefits in retirement, with the exception of a tax free lump sum of up to 25%, your income is subject to tax at your marginal rate. Given this, the whole concept of a lifetime allowance, which is after all a relatively recent concept introduced by the last Labour Government, is highly punitive and ultimately penalises decent investment performance. We would like to see this scrapped altogether - as does former Pensions Minister Steve Webb, who presided over its reduction - as it is a deterrent to making retirement provision and adds complexity.

“Until the lifetime allowance is scrapped, those with large pension pots likely to breach it should consider fixed protection to retain the existing £1.25 million allowance and instead consider funding a combination of ISAs and taxable growth investments, as well as utilising their capital gains allowances and potentially using riskier Enterprise Investment Schemes and Venture Capital Trusts.

“A close eye is needed by savers to keep track of their pension’s performance however as there is always the ability to break the protection and recommence funding if the plan falls behind or if the LTA is scrapped or uprated at some point.”

For further comment David Smith can be contacted at david.smith@tilneybestinvest.co.uk / 07778 066 367

*Figure is compound. Returns are not guaranteed. Investments can go down in value as well as up.

- ENDS -

Important information:

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

VCTs and EIS should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.

Press contacts:

Roisin Hynes
0207 189 2403
07966 843 699
roisin.hynes@tilneybestinvest.co.uk


About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.

For further information, please visit: www.tilneybestinvest.co.uk

About Tilney

Tilney is a leading investment and financial planning firm that builds on a heritage of more than 150 years. The Tilney Group operates under the Tilney brand for Investment Management and Financial Planning and Bestinvest for execution-only investing. We look after more than £22 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including Best Fund Platform and Best SIPP Provider at the 2017 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Group employs over 1,000 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.