The lifetime allowance affecting more people is not really a surprise. But the scale of the increase, along with the knowledge that many more clients will be affected over the next decade, highlights the need for careful planning.
For those clients who have not reached retirement age, it is worth considering whether ongoing pension payments are worthwhile if they may breach the lifetime allowance in future.
A key aspect is if the employer offers an alternative benefit in lieu of pension contributions. If not, continuing to pay into the pension is a simple decision.
If the employer does offer an alternative, then the position is more complex and involves analysing many aspects like the tax paid by the client and other potential investment options, such as Isas, bonds, venture capital trusts or pensions for other family members.
For those reaching retirement age, applying for some form of protection is an obvious route. Far more people applied for protection during the 2016/17 tax year, following the reduction in the lifetime allowance to £1m, than did in 2012 or 2014 when previous reductions took place.
But for those who have not yet applied, Individual Protection 2016 is likely to be the only option. This is still available to those who had pension savings worth £1m or more as at 5 April 2016, although there are limitations for those who already have some other form of protection.
Many others who will start to take benefits shortly, including some transferring from final salary schemes, may encounter the lifetime allowance over the next few years. That’s not necessarily when they first take benefits, but at age 75 when the second lifetime allowance check kicks in for those who use drawdown.
That second test measures the growth in value since the client entered drawdown and will particularly affect those with higher pots who take little, or no, income and achieve good investment growth.
It is crucial to be aware of the second check when considering how much income the client takes before age 75 and the appropriate investment strategy. But many other factors come into play, such as the income tax paid on any withdrawals and the client’s longer-term needs and objectives.
For those clients who never intend to withdraw funds but cascade them onto family, accepting a 25 per cent lifetime allowance tax charge on excess funds at age 75 may be the best strategy.
Many people dislike the arbitrary nature of the lifetime allowance and the fact it penalises those clients who obtain good returns on their investments. There is also a significant disparity in the way benefits are measured depending on whether people have defined benefit or defined contribution pensions. However, as long as we are stuck with it as part of the current pension tax framework, it remains a key area where people need the expertise advisers can bring.