Pensions Lifetime Allowance Planning
Posted by: Swindells FP, on August 10, 2015.
A reduction in the Pensions Lifetime Allowance will be introduced on 5th April 2016.
Pensions Lifetime Allowance is a limit on the value of pay-outs from pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge.
4 considerations to make for individuals who will be affected by the Pensions Lifetime Allowance reduction:
1. Consider whether to elect for some form of Pension ‘protection’ (Fixed or Individual Protection).
This should include individuals aged under 75 currently in receipt of pension drawdown benefits, if they feel they may breach this new £1M limit or the value of their pensions will be in excess of £1M at aged 75.
2. Consider the implications of an election for fixed protection.
Essentially, retaining a £1.25M lifetime allowance as fixed protection can only be retained where contributions cease and Final Salary (Defined Benefit) accrual is severely restricted.
After 6 April 2016, any individuals looking to make such an election will need to ensure that contributions/benefit accrual occurring before then are appropriately maximised and the impact of triggering the Annual Pensions contribution Allowance rules are considered.
3. Consider how best to minimise the value of benefits being tested against the lifetime allowance.
For instance, someone aged 55 or over looking to draw pension benefits in the next couple of years could consider drawing some or all of their benefits in 2015/16 when these will be set against the current £1.25 million lifetime pension allowance.
For example, if an individual crystallised benefits with a value of £500,000 in 2015/16 this would only use up 40% of his lifetime allowance whereas if he left this until 2016/17 it would use up 50% of his allowance.
4. Consider how pension benefits are taken.
For example, if a member had money purchase benefits, using his fund to purchase a scheme pension rather than a lifetime annuity may reduce the percentage of the lifetime allowance he has used up.
Although, of course, the purchase of a scheme pension may have the impact of passing pension funds via the nominee/successor route. A member of a Final Salary scheme should consider the difference in the lifetime allowance assessed where they draw their benefits solely as a pension or as a tax free cash sum with a reduced pension.
Swindells Financial Planning is here to guide you through these considerations. To book a complimentary consultation call us on 01825 763366.