lifetime allowance take it to the limit…. & beyond? · scheme pension increase to scheme...

This is for financial adviser use only and shouldn’t be relied upon by any other person.

LIFETIME ALLOWANCE TAKE IT TO THE LIMIT….

& BEYOND?

LIFETIME ALLOWANCE

At the end of this session you will have an understanding of:

• Why the lifetime allowance was introduced

• How the lifetime allowance works and the various protections available

• The options available if the lifetime allowance is breached and whether an opt-out is suitable

• Other factors impacting suitability and the regulatory requirements

LEARNING OBJECTIVES

LIFETIME ALLOWANCE RESTRICTING TAX RELIEF


Source: Budget 2004, Prudence for a purpose: A Britain of stability and strength, March 2004

“...broadly equivalent to the maximum pension allowable under the current occupational pensions regime…”

set the lifetime allowance…at £1.5 million…;

to provide certainty, pre-announce the lifetime allowance for all years up to 2010 such that it increases steadily to £1.8 million in 2010;

review the lifetime allowance level and indexation every 5 years, with the first review in 2010.


“... so that everyone contributes their fair share to reducing the

deficit…”

£m

Source: Royal London & Budget 2015

0

0.5

1

1.5

2

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10/1

1

20

11/1

2

20

12/1

3

20

13/1

4

20

14/1

5

20

15/1

6

20

16/1

7

20

17/1

8

20

18/1

9

20

19/2

0


deficit…”


Exchequer Impact (£m)

2015/16 2016/17 2017/18 2018/19 2019/20

+60 +300 +420 +550 +590

Source: gov.uk Policy paper “Reduction of pensions lifetime allowance”, published 9 December

LIFETIME ALLOWANCE TAKE IT TO THE LIMIT….& BEYOND?

If LTA Growth at 2.5%

5 years £1,193,636

10 years £1,350,489

15 years £1,527,955

20 years £1,728,740

25 years £1,955,911

£100,000 57.03% 24.58% 15.54% 11.39% 9.04%

£300,000 29.72% 14.46% 9.82% 7.59% 6.30%

£500,000 17.85% 9.40% 6.73% 5.43% 4.67%

£700,000 10.49% 6.06% 4.63% 3.93% 3.51%

£900,000 5.23% 3.58% 3.04% 2.77% 2.62%

Assuming £10,000 per annum pension contribution

Growth rate to exceed LTA Threshold

LIFETIME ALLOWANCE BCES

Designating funds for drawdown

Entitlement to scheme pension

Increase to scheme pension in payment

Purchase of a lifetime annuity

5 x death/age 75 Relevant lump sums

Relevant lump sum death benefits

Transfer to QROPS Prescribed authorised

member payments

13 Benefit Crystallisation Events (BCEs), most common are:

LIFETIME ALLOWANCE PROTECTION



deficit…”

£m

Source: Royal London & Budget 2015

0

0.5

1

1.5

2

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10/1

1

20

11/1

2

20

12/1

3

20

13/1

4

20

14/1

5

20

15/1

6

20

16/1

7

20

17/1

8

20

18/1

9

20

19/2

0

Enhanced

Primary IP 2014

FP 2014

IP 2016

FP 2016 FP 2012


Fixed Protection 2016

Keeps LTA at £1.25 million after 06/04/2016

Available to anyone who doesn’t have Primary, Enhanced or Fixed 2012/2014

Lost if contributions made or further accrual above the ‘relevant percentage’ occurs

Can be held in conjunction with Individual Protection 2016

Individual Protection 2016

Must have pension savings of more than £1m at 05/04/2016

Protects members LTA at pot level subject to maximum of £1.25m

Can continue with pension contributions

Unavailable in conjunction with Primary Protection or IP 2014

LIFETIME ALLOWANCE FIXED PROTECTION

Example 1

Fund value of £1.2m at 5 April 2016

Applied for FP2016

No further contributions made

£300k investment

growth to BCE

1

1.25

1.5

£m

Growth to BCE

FP2016

5 April 2016

£250,000 chargeable

£1.25m protected

LIFETIME ALLOWANCE FIXED & INDIVIDUAL PROTECTION

Example 2

Fund value of £1.2m at 5 April 2016

Applied for FP & IP 2016

Poor investment performance

Fund value drops to £1.1m

1

1.25

1.5

£m FP2016

5 April 2016 £1.1m

at BCE

FP LOST

£1.2m protected

Payments made


FP2016 suitable where:

Fund value likely to exceed LTA in future

Even without further contributions

IP2016 suitable where:

Fund value is more than £1m on 5 April 2016

Might want to make more payments

Employer only payments

LIFETIME ALLOWANCE OPTIONS

Options when Lifetime Allowance exceeded:

Take all the excess as cash @ 55% LAC 1

Take all the excess as income @ 25% LAC 2

Don’t touch the excess yet – no immediate LAC 3

Do nothing until LTA test forced 4

LIFETIME ALLOWANCE

Case study 1:

Jim is 65

His total pension savings amount to £1.5m

He has no protection and has not crystallised anything so far

What are Jim’s options?

OPTIONS

£1.5m

£1.055m £445k

-55% £244.75k

£791.25k

£263.75k PCLS

£200.25k

£464.00k

Taxed as income Tax Free

Take all the excess as cash @ 55% LAC 1

£1.5m

£1.055m £445k

-25% £111.25k

£263.75k PCLS

£791.25k

£333.75k

£1.125m

Taxed as income

Take all the excess as income @ 25% LAC 2

£1.5m

£1.055m £445k

£263.75k PCLS

£791.25k

LTA test at next BCE or age 75

Any growth increases LTA

charge Taxed as income

Don’t touch the excess yet – no immediate LAC 3

£1.5m

Tested at age 75 against full fund

including any growth

Do nothing until LTA test forced 4


When a member reaches age 75

BCE 5, 5A or 5B trigger another LTA test

BCE 5

All or part of DB entitlement not

taken

BCE 5A Drawdown or

flexi access drawdown

BCE 5B Unused funds in

a money purchase scheme


Example 1 – BCE 5A

Member takes PCLS only from a £1.055m fund at age 65 (£263.75k)

Remaining fund value has increased from £791.25k to £1.1m at age 75

Value at 75 = £1.1m minus £791.25k Chargeable = £308.75k


Example 2 – BCE 5B

Member has a £2m money purchase fund at age 73 and hasn’t taken any benefits yet

Crystallises £800k, taking £200k PCLS and designating £600k to drawdown…

…using up 75.83% of the Lifetime Allowance

And leaving a fund of £1.2m



Member reaches age 75, triggering BCE 5B

Assuming no growth on drawdown or remaining fund Value at 75 = £1.2m minus 24.17% of remaining lifetime allowance = £255k Chargeable @ 25% = £945k Remaining fund (£1.2m - £236.3k) =£963.75k



Member decides to crystallise remaining £963.7k age 77

No further BCE is triggered

BCE 5B ignored for PCLS purposes Max PCLS allowed = £263.75k minus PCLS taken at age 73 = £200k PCLS available at age 77 = £63.75k

LIFETIME ALLOWANCE OPTIONS – PLANNING POINTS

Withdraw growth from crystallised funds

before age 75

Apply for fixed or individual protection

where available

Discuss LTA with personal

representatives

LIFETIME ALLOWANCE TAKE IT TO THE LIMIT….

& BEYOND?

LIFETIME ALLOWANCE

1 • Calculate value of benefits and LTA at projected retirement • Contributions/investment returns

2

• Calculate the overall cost of maintaining existing arrangements to expected retirement

• Rate of tax relief

3 • Calculate benefits net of any tax charge • Scheme Rules/Factors/Protection/change in level of LTA

28

TAKE IT TO THE LIMIT….& BEYOND

LIFETIME ALLOWANCE

4 • Calculate value of deferred benefit (at retirement) • Investment return/Revaluation rate/change in LTA

5 • Identify value of alternate arrangements (if any) • Net cost/Investment return

6 • Add deferred benefit value to value of alternate arrangements

29


LIFETIME ALLOWANCE

Case study 2:

Abby is 55, lives in England, is a 40% tax payer and earns £80k p.a. She plans to retire at 60

Total pension savings amount to £980,000

Has no protection and has not crystallised anything so far

Abby’s employer pays 6% pension contributions

Abby pays a further 6% pension contributions matched by her employer

She is considering opting out as she’s concerned about the LTA threshold

What are Abby’s options?



Abby opts out Abby stays in Abby stays in

E’er only cont E’er & E’ee cont

Option A B C

LTA at age 60 £1,193,636 £1,193,636 £1,193,636

Fund at 06/04/2019 £980,000 £980,000 £980,000

Net cost to Abby £0 £0 £15,290

Fund at retirement £1,192,320 £1,220,747 £1,277,602

LTA excess £0 £27,111 £83,966

LTA charge (lump sum) £0 £14,911 £46,181

LTA excess (lump sum) £0 £12,200 £37,785

Fund after charge £1,192,320 £1,205,836 £1,231,421

LIFETIME ALLOWANCE

5 • Identify value of alternate arrangements (if any) • Net cost/Investment return

6 • Add deferred benefit value to value of alternate

arrangements

32


LIFETIME ALLOWANCE

5 • 6% salary per annum in to ISA for 5 years @4%p.a. growth • £17,186.11

6 • Add deferred benefit value to value of alternate

arrangements

33



Abby opts out Abby stays in Abby stays in

E’er only cont E’er & E’ee cont

Option A B C

Fund at retirement £1,192,320 £1,220,747 £1,277,602

Fund after charge £1,192,320 £1,205,836 £1,231,421

Net Benefit £0 £13,516 £39,101

ISA Benefit £17,186 £17,186 £0

Total Benefit £17,186 £30,702 £39,101

LIFETIME ALLOWANCE

• Dependants’ benefits

• Ill-health benefits

• Distribution of death benefits

• Public sector – “protections”

• Wider tax implications

WIDER CONSIDERATIONS

LIFETIME ALLOWANCE REGULATORY

LIFETIME ALLOWANCE REGULATORY

• “Client’s best interests” rule • COBs 2.1.1R

• Is it a “pension opt out” ?

• COBs 19.1.1

LIFETIME ALLOWANCE PENSION OPT OUT UNDER COBS 19.1.1

Opt out from: Occupational/GPP/GSP to which employer contributes

Decline to join: Occupational/GPP/GSP to which employer contributes

OR

AND

Opt out is “in favour of” a PP or SHP

AND

Opt out relates to (potential) safeguarded benefits

LIFETIME ALLOWANCE OPT-OUT UNDER COBS 19.1

Requirement

Starting assumption = opt out not suitable

Clear demonstration that the opt-out is in the client’s best interests.

Given or checked by pension transfer specialist (GARs excepted)

Ensure transfer specialist checks and confirms advice

Adequacy of information – firms working together

Execution only – record that no recommendation made

Suitability report must contain: • Advantages/disadvantages of recommendation • Analysis of financial implications of opt-out • Summary of other material information

Advice not to proceed must be given in writing

LIFETIME ALLOWANCE

• Client’s intentions

• Attitude to/understanding of risk of giving up safeguarded benefit

• Attitude to/understanding of investment risk

• Realistic retirement income needs

“IN THE CLIENT’S BEST

INTERESTS”

LIFETIME ALLOWANCE

• Ensure clients understand payment of a tax charge is not always a bad thing

• Processes for opt-out recommendations which do/don’t fall under COBs 19.1

• Always consider the wider factors

PLANNING POINTS

LIFETIME ALLOWANCE

Further information

• https://adviser.royallondon.com/globalassets/docs/adviser/misc/1901-annual-lifetime-allowance-guide.pdf https://adviser.royallondon.com/technical-central/pensions/

• https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm080000

TAKE IT TO THE LIMIT….& BEYOND?

https://adviser.royallondon.com/globalassets/docs/adviser/misc/1901-annual-lifetime-allowance-guide.pdf












https://adviser.royallondon.com/technical-central/pensions/




https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm080000










“We contend that for a nation to try to tax itself into prosperity is like a man

standing in a bucket and trying to lift himself up by the handle.”

Winston Churchill

LIFETIME ALLOWANCE

At the end of this session you will have an understanding of:

• Why the lifetime allowance was introduced

• How the lifetime allowance works and the various protections available

• The options available if the lifetime allowance is breached and whether an opt-out is suitable

• Other factors impacting suitability and the regulatory requirements

LEARNING OUTCOMES

THANK YOU

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales, company number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in England and Wales company number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. July 2019 PR 6 ON 0004

lifetime allowance take it to the limit…. & beyond? · scheme pension increase to scheme...

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