Lifetime allowance changes
With September’s CPI figures now being released we know what next year’s Lifetime Allowance (LTA) will be - £1,054,800. Whilst hardly a dizzying increase we are at least crawling in the right direction after years of being pegged back. I get a few surprised looks when I remind people that the original version of Finance Act 2004 included a clause that the standard lifetime allowance could only increase.
This year’s uplift was only 2.4%, slightly less than expected due to a dip in CPI. If we were to have increases of 2.5% year-on-year going forward, it would ‘only’ take us 22 years to get back to the £1.8m allowance we enjoyed in 2010/11 and 2011/12.
At the Government’s target of 2% CPI the timeline needed rises to 27 years (2046/47). If we’d had 2% increases from £1.8m in 2010/11 by 2046/47 the LTA would be more than double that at just over £3.6m.
When the LTA was introduced it was the main check on pension savings, as we had an annual allowance of £215,000 rising to £255,000. (Who can remember changing pension input periods and getting in contributions of £500,000 over two days?) Now we have checks at both ends of the process, and the LTA can sometime be seen as a tax on growth.
So, do you stop funding if you think there’s going to be an LTA issue?
As ever, it depends. For higher and additional rate tax payers funding can still make sense for succession planning if they don’t need the money themselves and their beneficiaries are likely to be basic or non-taxpayers such as grandchildren. If the member dies before age 75 any funds in excess of the LTA will normally be taxed at 25% when used to provide a beneficiary’s drawdown fund, with no further tax to pay.
Hopefully the member survives past age 75, so there will be an LTA test at that point. The 25% tax on any excess over the LTA will be deducted following the 75th birthday, but if the beneficiaries who later receive the income are non-taxpayers then they can use personal allowances to manage withdrawals and potentially have no further tax to pay. Even for basic rate tax payers the total effective rate of tax would be 40% - which if you’ve had 40% or 45% tax relief going in and then benefitted from tax-free growth isn’t a bad deal.
Clearly a big risk in advising on such matters is the legislative risk that the rules will change. We were told the LTA could only go up and we saw what happened to that. I wouldn’t be putting my money on death benefits rules remaining as they are for another generation, so whilst you can only advise on current rules, the risk must be acknowledged.