GE Life has raised concerns that some pension policy holders could exceed their Lifetime Allowance limit (LTA) and be subject to a higher tax charge after new rules are introduced on ‘A' Day.
The company claims those policy holders who appear to be ‘safe’ might actually be most ‘at risk’ as they may have to face a Lifetime Allowance charge at retirement, if their fund exceeds the LTA.
It argues a person aged 45 with a fund of just £500,000 could find the new rules after pension simplification is introduced in April 2006 mean they may be in danger of exceeding the LTA and as a result HM Revenue and Customs will levy a tax charge of 25% if the exceeding benefit is taken as income and 55% if it is taken as a lump-sum. This situation is compounded, says the provider, for those who are continuing to pay contributions. GE Life plans to highlight these risks to both customers and financial advisers over the next few months.
Ray Chinn, drawdown product manager at the provider, says: “Although there have been many ‘technical’ views expressed regarding the changes, little practical assistance has been available to date to help advisers or their clients understand the specific impacts and options ahead of ‘A’ Day. Our aim is to ensure that over the coming months all our customers are fully equipped with all the information they need. One key recommendation is that people should seek professional advice.”
But John Lawson, marketing technical manager at Standard Life, says: “Although this is possible I doubt that everyone with a pot of say £500,000 will be caught. What advisers need to do is project the fund at a reasonable rate of growth to the client’s retirement and compare it to the lifetime allowance limit that will be in place at that point. If the client takes income drawdown then they are subject to a second income test either when they do buy an annuity or at age 75. The projection should continue to whichever is the latest date and if the fund exceeds the LTA the client should consider claiming protection to avoid a Lifetime Allowance charge.”
Adrian Boulding, pensions strategy director for Legal and General, adds: “From our point of view, people who have over £500,000 in a pension plan with us often also have other pensions elsewhere. This increases the likelihood of them exceeding the LTA, either straight away at A-Day, or sometime between A-Day and retirement if their investments get a following wind. We will be notifying all customers with large funds, and sending a copy of our letter to their IFA. It is the customer’s professional adviser who is best placed to collate the various fund values and help their client to decide on whether to register for protection.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
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