The lifetime allowance drops to £1.25m at the end of this tax year exposing some people to potential tax charges. Helen Morrissey looks at what advisers can do to protect their clients.
In April 2014 the lifetime allowance will drop to £1.25m, and advisers will need to speak to those clients likely to breach this amount about how best to protect their pension pot.
Pension pots above this level could find themselves subject to a 55% tax charge on the residual amount.
While advisers are talking to clients with pensions close to this amount, figures from HMRC show we could be underestimating the scale of the problem. While 30,000 people could find themselves with an immediate liability by 6 April 2014, the research also found up to 360,000 people could find themselves with a liability in the long term.
Research by Standard Life shows that people with as little as £700,000 in their pension pot will need to be made aware that they have a possible liability and will need to make decisions as to the best course to take.
“I don’t think there is enough awareness about this issue,” says Standard Life’s head of consolidation Alistair Hardie. “Recent research we did showed only about 19% of people actually know what a lifetime allowance is. We need to work to ensure people are able to make decisions from an informed standpoint.”
Who could be affected?
Barnett Waddingham’s head of executive pensions, Bhargaw Buddhdev agrees advisers need to look beyond the immediately obvious when targeting clients who could have a liability.
“I saw someone recently who was only 40 years of age, but when we looked at his pension we could see that if he remained in the scheme he could find himself with upwards of £2.5m in his pension by the time he comes to retire,” he says.
So what should advisers be looking for when assessing whether clients might have a lifetime allowance issue? Fund size is of course a key component, although getting up to date valuations can be more difficult than first thought, according to St James’s Place, divisional director pensions Ian Price.
“You need to get a good idea of what pensions people have. While it is easy enough to get valuations for defined contribution [DC] schemes it can take a long time to get valuations for defined benefit [DB] and you need to build this time into your plan,” he says.
“You will find that many of those with a liability will have some element of DB in their pensions. You also need to check that your clients haven’t forgotten about any pensions they may have elsewhere. Experience shows that this happens a lot.”
Price also says advisers need to take a close look at clients’ contribution history to determine whether a liability may come due.
“If you look through to A-Day when people could put up to £255,000 per year into a pension then you will see that many people have made sizeable contributions to their pensions in recent times,” he says. “They could well have an impending liability and you could find people even in their 40s could have an issue and need to look at whether they should get some protection.”
There are many options open to clients in this situation and bringing them to their attention is a great way for advisers to demonstrate the value they can add to their clients.
For instance, the decision to take up protection is not automatic. If opting out of a pension scheme means losing valuable benefits such as life cover, it might be better to remain in the scheme and take the tax hit. There are also wider planning opportunities.
“It’s wider than just deciding whether to protect or not,” says Hardie. “Each client will have different needs and what is right for one may not be right for another. Advisers will need to have done their homework. For instance, if you have a working spouse who does not have a liability then perhaps you could contribute to their pension instead. You may also choose to adopt a more conservative investment strategy in your pension that allows you to be more adventurous elsewhere.”
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