The Lifetime Allowance: 5 Myths debunked

The Lifetime Allowance: 5 Myths debunked

With the upcoming Autumn Statement, as well as recent HMRC figures looking at the amount of tax revenue gained from the Lifetime Allowance, there has been much talk about the LTA, its benefits and its risks. But how much to savers truly understand about it?

Gary Smith, financial planner at Tilney, looks at the five most common myths associated with the allowance.

1. I will be charged straight away

“When it comes to the Lifetime Allowance, the first misunderstanding is that you’ll receive a charge as soon as soon as your pension savings exceed your available Lifetime Allowance threshold, which currently stands at £1m, but could be higher if you have applied for protection. This is not the case. In fact, you could have pension savings well in excess of the Lifetime Allowance and never actually pay the charge during your lifetime.

“Your pension benefits are only ever assessed against the Lifetime Allowance when a ‘Benefit Crystallisation Event’ (BCE) takes place, and only if the value of your benefits exceed the Allowance will a tax charge be incurred. For example, taking pension benefits is one such event, but if you elect to defer taking your pension, your funds can continue to grow in a tax free environment above the Lifetime Allowance, until benefits are taken, you reach your 75th birthday or death, whichever comes first. So, let us assume an individual has £2m in their SIPP and opts to move £1m into drawdown, from which they withdraw £250,000 in tax-free cash. As the amount moved into drawdown doesn’t exceed the Lifetime Allowance, no tax charges will be incurred, although any subsequent retirement benefits taken from the remaining £1m will incur tax charges.

2. My whole pension pot will be charged

“People fear the Lifetime Allowance, especially as it has decreased to such a level where many of Middle England are now feeling the effect. However, savers must remember that the charge is only applied to the excess savings above the lifetime allowance – not the whole pension fund. For example, if an individual has £1,001,000 in their pension fund when they access their entire pension benefits, the charge is only applicable to the £1,000 excess – not the remaining £1m.

“It is important to remember this point as many are turning down pension contributions for fear of a breach. Considering the fact that receiving an employer’s pension contribution when your pension fund is already valued at £1m will have no effect on the savings made to date, turning down this contribution may not be in their best interest. After all, 45% of something is better than 100% of nothing…

3. My pensions benefits will only be tested once

“It is a fallacy to assume that your pension benefits will only ever be tested once in your lifetime against the Lifetime Allowance. They can in fact, be tested on numerous occasions.

“For example, an individual may decide to take their pension benefits from their £1.5m pension fund. They take their maximum tax free cash allowance of £250,000 and take the excess above the lifetime allowance as a lump sum too, subject to a tax charge of 55% (£500,000 x 55% = £275,000). The remaining £750,000 is held in the flexible drawdown plan.

“From the drawdown plan they take only negligible levels of income over the next ten years and at age 75, the fund grows to £1m. An individual hitting age 75 with Drawdown funds is also a testing point for the Lifetime allowance. That is, the fund value at that date (£1m) less the original amount moved to drawdown (£750,000) will be subject to a lifetime allowance tax charge. This is likely to be another 25% tax on £250,000 (only 25% charge this time as funds are technically being designated for income).

“Simply put, if an individual satisfies the criteria for any of the 9 Benefit Crystallisation Events throughout life or upon death, a charge may become payable, regardless of whether they have been liable to a charge in the past.

4. The pension scheme / my employer will pay my charge

“Again this should not be counted on. While in practice the scheme will likely pay the charge if such a liability is known, it is not always so. HMRC state that the scheme and the pension member are jointly and severally liable and if the scheme – in good faith – is unaware of a liability, or is provided incorrect information, the liability falls completely on the member to pay the charge via their self-assessment for tax. It is imperative that this is determined with the pension scheme, to ensure no unwanted tax bills are received further down the line.

5. I should simply avoid a pension scheme due to this allowance

“The Lifetime Allowance is not all bad news. Whilst it is no doubt an unwanted beast, it should not be feared as much as to deter an individual from pension saving. It is as detailed above, only applicable if a BCE takes place on the excess funds above the Lifetime Allowance and the charge is only applied to the excess in question. Therefore, the charge can be controlled somewhat.

“For example first and foremost, it is the decision of the pension member as to whether a 55% charge or a 25% charge is applied. If the individual is a basic rate taxpayer, it may be pertinent to take an income from the excess above the lifetime allowance as the total tax / charge will likely be less than 55%, conversely, if the individual is an additional rate taxpayer it may be prudent to take the lump sum and suffer the immediate 55% charge.

“What’s more, the individual could simply elect to take pension benefits up to the lifetime allowance and refrain from crystallising the remaining funds, until age 75 or death, whichever comes first. This will ensure only one such Lifetime Allowance charge is payable. Or indeed, an individual could ‘crystallise’ their pension fund immediately before attaining £1m by taking their entire tax free cash entitlement. Any growth thereafter in the value of the drawdown fund could be drawn as an income ensuring that simply the initial amount moved to drawdown (£750,000) is left at either age 75 or death. As a result the lifetime allowance would not be breached at either event and resultantly, no lifetime allowance charge will be due.

“Ultimately, the Lifetime Allowance should not be dreaded and with good financial planning can potentially be mitigated somewhat for the benefit of you and your beneficiaries.”

To discuss this or any other financial planning topic please contact Gary Smith on 0191 269 9971/ gary.smith@tilney.co.uk

-ENDS-

Important information:

The value of investments, and any income derived from them, can go down as well as up and you may get back less than you originally invested. This press release does not constitute personal advice. Past performance is not a guide to future performance.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.

Press contacts:

Katy Moore 0203 818 6969 / 07805 727 023 katy.moore@tilneybestinvest.co.uk

Gillian Kyle 0203 818 6846 / 07989 650 604 gillian.kyle@tilneybestinvest.co.uk

About Tilney Bestinvest Group

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. The Tilney Bestinvest Group operates under the Tilney or Towry brand for Investment Management and Financial Planning and Bestinvest for execution-only investing. We look after more than £20 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 Advisory Service in the 2015 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 Bestinvest 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.

Tilney Bestinvest Group includes the following regulated entities: Tilney Investment Management (Reg. No. 02010520), Tilney Asset Management Ltd (Company No. 03900078), Thurleigh Investment Managers LLP (Company No. OC309191), Bestinvest (Brokers) Ltd (Reg. No. 02830297), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706), each of which is registered in England and authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ. Tilney Bestinvest Group also includes the following regulated entities: Towry Limited (Company no. 00607039), Towry Investment Management Limited (Company no. 00793636), Towry Asset Management Limited: (Company no. 03691998), UK Portfolio Management Limited: (Company no. 02519968), Towry Pension Trustees Limited: (Company no. 00781047) and Towry Fund Managers Limited: (Company no. 08884797).

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