Pensions lifetime allowance on course to jump

The pensions lifetime allowance (LTA) is on course to increase for the first time in seven years next April, as it starts being linked to inflation.

Figures out today (12 September) suggest the change could see an increase in the amount people can squirrel away for their retirement with the benefit of tax relief.

The impact on the lifetime allowance, which takes effect from April 2018, will be based on the annual increase in CPI during the year to this September, the figures for which are due out next month.

This morning it was announced the consumer price index (CPI) rate had increased again to 2.9 per cent for August, up from 2.6 per cent in July.

The LTA represents the maximum amount of money a saver can save in their pension pot – and benefit from tax relief at their marginal rate – before incurring an additional tax charge of up to 55 per cent.

After rising steadily from £1.5m in 2006 to £1.8m in 2010, the LTA has been subsequently reduced in stages to £1m over the last seven years.

For Rachel Vahey, product technical manager at Nucleus, this predicted rise “seems to go against the recent direction of travel”.

She said: “There has been endless discussion about pensions tax relief over the past few years – varying from wholesale reform, and moving to a pension Isa, to the incessant chipping away at the allowance levels – whether that is the lifetime allowance or the annual allowance.”

Ms Vahey added that there are regular predictions among the industry that the lifetime allowance will go down from £1m.

However, in July the HM Treasury confirmed its decision to press ahead with an increase in the LTA, in line with inflation.

According to Ms Vahey, “advisers need to work with their clients who are thinking of taking benefits over the next few months, and for whom the lifetime allowance may be an issue”.

She said: “These clients may want to consider delaying taking benefits until next April, as they may pay a smaller amount of tax.

For Jonothan McColgan, director and chartered financial planner at Bath-based Combined Financial Strategies, the increase in the LTA is “a good first step”, as the LTA “has been absolutely penalised since it was introduced”.

He said: “It seems draconian to have a penalty for success. We have very restrictive annual allowances now.

“So really, for those who are going to breach lifetime allowances, specially through personal defined contribution pensions, it is going to be due to the success of investment performance. So why should some people be penalised for taking a risk?”

According to Mr McColgan, only a small proportion of his clients “could actually benefit from deferring [benefits] at this specific moment in time”.

The majority of his customers, “because they are no longer employed, have financial needs that are more important than trying to get an extra few per cent on the LTA,” he added.

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