Upcoming changes to Lifetime Allowance mean the timing of drawing benefits could prove vital. Graham Slater looks at the ways clients can minimise the associated tax charges.
Inflation Set to Rise
The times, they are a changin’! For the last 15 years the financial world has enjoyed a period of relative stability. Inflation has been pretty much stagnant for since April 2012. But the latest predictions show that this is soon to change.
One impact this will have on ordinary savers is on Lifetime Allowance tax charges which are set to rise next year. The impact may, at first glance seem small, but when taken in a wider view could have important implications forholders.
Lifetime Allowance Tax Charges
The Lifetime Allowance is currently set at £1m. In April next year (2018) this is scheduled to increase in line with inflation. For our clients, and savers everywhere, it’s vitally important to be aware of this increase, as the timing of benefits could prove crucial in the managing of your tax affairs.
In particular, this timing could be extremely important for those people who are phasing their vestings as part of an income strategy in the decumulation stage.
Inflation Linked Increases
The increase to the Lifetime Allowance from April next year is calculated in line with the change in Consumer Prices Index (CPI) over the 12-month period between September 2016 and September 2017, then rounded to the next £100.
For the last 15 years, inflation has remained virtually stagnant. The new inflation increase, which has now been confirmed at 3%,) will result in a new Lifetime Allowance of £1,030,000 for the tax year 2018/19.
Lifetime Allowance Change Implications
At first glance, it may not seem as though this is a particularly large increase. But, it could result in tax savings for some clients whose pension funds are, or might be, close to the current lifetime allowance.
If this is the case, it’s well worth making the most of!
At each vesting, the value of benefits taken is tested against the lifetime allowance and expressed as a percentage of the allowance in force at the date of vesting.
For those who decide to delay drawing benefits until after April 2018, they will be using a smaller percentage of their allowance, giving themselves additional scope and possibly reducing any Lifetime allowance tax charge they have to pay.
Example: Dave and Sheila
Dave has a pension fund of £900,000. He decides to draw benefits on 31 March 2018 taking only his pension commencement lump sum.
Unless he has some form of Lifetime Allowance (LTA) protection in place, such as Fixed or Individual, he will use up 90% of his, (and the current level of) Lifetime allowance.
By not drawing income he is not subject to the money purchase annual allowance (MPAA) of £4,000, and could, therefore, more easily fund for a further 10% of the LTA that is in force when he next chooses to vest.
Sheila also has a pension fund of £900,000. She decides to delay drawing benefits from her pension fund until after 5 April 2018.
In this circumstance, Sheila will use only 87.38% of her LTA, allowing her scope to fund for a further 12.62% of the LTA that is in force when they next choose to vest.
Similarly, someone who has already drawn part of their pension fund, and is perhaps phasing their benefit vestings as part of an income strategy in decumulation could also benefit from holding back their next instalment. Taking a tranche of £15,000 in March 2018 would use up 1.5% of their remaining LTA, whereas a deferral to 6 April 2018 could mean using only 1.46%.
Work with your Financial Advisors
Although the changes in the Lifetime Allowance seem to be relatively small, in the overall picture, the timing of drawing benefits could prove important when managing and minimising your tax charges. By working with your Financial Advisors, we can help you find the best solution and timing for drawing down and make sure you claim the maximum benefit from the upcoming changes.
However, a word of warning! The financial planning world is currently in preparation. For the first time, the twice yearly financial statement from the Chancellor of the Exchequer is about to be replaced by a single Autumn Budget. The rumours have already reached both national and trade press that the LTA may be one of the targets in his sights. So working on a solution now, could well be worth your while.