Bursting the bubble on the Lifetime Allowance Increase

Next month’s increase means it’s time to review your pension and protection.

The amount you can save into a pension during your lifetime while still qualifying for valuable tax breaks, will rise in April 2018 for the first time in 6 years.

The current Lifetime Allowance (LTA) stands at £1m but will be increased in line with the Consumer Price Index (CPI) to £1.03m. This important change was announced in the budget and is excellent news for those nearing, or expecting to exceed marginally, the current £1m threshold.

The Lifetime Allowance limit was introduced in 2006 at £1.5m as a maximum fund an individual could accumulate into a pension without further tax charges.

From 2006, the Lifetime Allowance limit increased steadily year-on-year until it peaked in 2010/11 and 2011/12 at £1.8m. Until now, it has been on a decline ever since.

So, what does the increase mean for your pension?

For those approaching the current Lifetime Allowance limit of £1m, the upcoming increase provides a welcome opportunity to save more into a pension pot. It is also expected to provide a saving of up to £16,500 for those with large funds.

Those with large funds will, however, need to review their pension and ensure that they have adequate protection in place.

Schemes that can allow you to protect your Lifetime Allowance include:

Fixed Protection (FP2016)

There is no minimum pension value required to apply for Fixed Protection 2016. This scheme will fix an individual’s Lifetime Allowance at £1.25 million instead of any future reduced limits.

The condition of Fixed Protection is that you give up on all future pension saving so this needs to be carefully considered.

In some limited circumstances, such as if you believe a fall in fund value will affect your overall retirement, you could make a subsequent pension contribution and effectively ‘burst’ your protection. This would then remove the protection previously held and you would then be subject to the current Lifetime Allowance available at this point.

Individual Protection (IP2016)

Individual Protection 2016 is only available if the value of your pension savings on 5th April 2016 was over £1 million.

Individual Protection 2016 protects your Lifetime Allowance to the lower of the value of your pension savings on 5th April 2016 or £1.25m. With Individual Protection you can continue to make pension contributions but you must pay tax on the money taken from your pension that exceeds your protected Lifetime Allowance.

It is important to note that when considering if you are approaching the Lifetime Allowance limit, that it applies to the total of all the pensions you have, excluding your State Pension. It also includes the value of pensions promised through any Defined Benefit Schemes you belong to. A Defined Benefit Pension Scheme, where payment commenced before 2006, could trigger a tax charge on other pensions yet to come into payment.

This is a complicated area of Financial Planning so we recommend that you seek advice from our pension experts before taking action.

To arrange a free initial meeting call us on 01244 347 583 or email us at: info@innesreid.co.uk.