Lifetime Allowance to drop to £1.5m
Tuesday, 21 December 2010 10:09 |
When so-called Pension Simplification was introduced in April 2006, a limit was placed on the amount of money that savers could build up in their pensions before being hit by a punitive “Recovery Charge”. This amount was set at £1.5m in 2006/07, rising to £1.8m in 2010/11.
On 14th October 2010, the Treasury announced that the Lifetime Allowance will drop back down to £1.5m from April 2012. This new allowance is not due to be indexed before 2016 and there are no guarantees that it will be indexed after that. It is understood that transitional measures will be put in place for those people immediately affected by this but no details have been provided as yet.
£1.5m is a significant amount of money and anyone starting their pension provision today would struggle to reach that limit, unless investment returns were very good, given the tax-efficient cap on contributions of £50,000 p.a. post April 2011.
However, those people who have already built up sizeable pension funds, perhaps by taking advantage of the generous pension allowances between 2006/07 and 2008/09, or by being members of a defined benefit (e.g. final salary) pension scheme, may be closer than they think, particularly if they make an assumption for future investment returns and future contributions.
Take a 45 year old with a pensionable salary of £120,000 with 20 years’ service in a 1/60ths final salary pension scheme. That benefit currently equates to 20/60ths of £120,000, so £40,000 p.a. If we assume that they stay in that job until 60, they will have built up 35 years’ service, so £70,000 p.a., without even factoring in any future pay increases. This figure is multiplied by 20 to calculate the “value” of the pension for Lifetime Allowance purposes. Therefore, this scheme member is on track to have a pension of £1.4 million and, to reiterate, this is without taking into account future pay rises or the amount that they might have invested, or plan to invest, in money purchase pensions such as AVCs or personal pensions.
Equally, if someone had built up a fund of £750,000 in money purchase pensions, if they achieved a 7% p.a. growth rate after charges, it would take less than 11 years for that pension fund to more than double to over £1.5m, even if they were to stop future contributions into the pension.
If the Lifetime Allowance doesn’t get indexed post 2016, we anticipate this being a potential issue for many of our clients. One approach may be to reduce investment risk within the pension so as to have less chance of breaching the Lifetime Allowance, in favour of taking more investment risk within other parts of their portfolio to compensate for this.
On 14th October 2010, the Treasury announced that the Lifetime Allowance will drop back down to £1.5m from April 2012. This new allowance is not due to be indexed before 2016 and there are no guarantees that it will be indexed after that. It is understood that transitional measures will be put in place for those people immediately affected by this but no details have been provided as yet.
£1.5m is a significant amount of money and anyone starting their pension provision today would struggle to reach that limit, unless investment returns were very good, given the tax-efficient cap on contributions of £50,000 p.a. post April 2011.
However, those people who have already built up sizeable pension funds, perhaps by taking advantage of the generous pension allowances between 2006/07 and 2008/09, or by being members of a defined benefit (e.g. final salary) pension scheme, may be closer than they think, particularly if they make an assumption for future investment returns and future contributions.
Take a 45 year old with a pensionable salary of £120,000 with 20 years’ service in a 1/60ths final salary pension scheme. That benefit currently equates to 20/60ths of £120,000, so £40,000 p.a. If we assume that they stay in that job until 60, they will have built up 35 years’ service, so £70,000 p.a., without even factoring in any future pay increases. This figure is multiplied by 20 to calculate the “value” of the pension for Lifetime Allowance purposes. Therefore, this scheme member is on track to have a pension of £1.4 million and, to reiterate, this is without taking into account future pay rises or the amount that they might have invested, or plan to invest, in money purchase pensions such as AVCs or personal pensions.
Equally, if someone had built up a fund of £750,000 in money purchase pensions, if they achieved a 7% p.a. growth rate after charges, it would take less than 11 years for that pension fund to more than double to over £1.5m, even if they were to stop future contributions into the pension.
If the Lifetime Allowance doesn’t get indexed post 2016, we anticipate this being a potential issue for many of our clients. One approach may be to reduce investment risk within the pension so as to have less chance of breaching the Lifetime Allowance, in favour of taking more investment risk within other parts of their portfolio to compensate for this.
