The Lifetime Allowance (LTA) was expected to increase to £1,078,900 from 6 April 2021 but it was announced in the Budget that it has been frozen at £1,073,100 until April 2026. Whilst in the short term this is not material, not having any increases in the LTA for the next five tax years could have a much larger impact, and, as time goes by, more people will be affected.
An LTA charge only arises when benefits over the LTA are crystallised or at age 75, if later. For those individuals where the value of their pension savings exceeds the LTA, it is possible to crystallise benefits almost up to the LTA, and then crystallise a little more as the LTA increases, without incurring an LTA charge. Over the next five years, the LTA was expected to increase by approximately £125,000 (based on current CPI) which could have meant an extra £31,250 being available as a tax-free cash sum.
Therefore, if individuals with pension funds close to the LTA were relying on increases in the LTA to mitigate any LTA charge, they should consider whether they still want to wait to crystallise benefits or to take their benefits sooner and pay any LTA charge. As the LTA is a threshold rather than a ceiling, it may suit individuals to receive pension benefits and incur a tax charge rather than defer crystallising benefits in the hope that the LTA may increase or change completely before they reach age 75. The LTA charge is deducted immediately benefits are crystallised and depends on how the pension savings above the available LTA are taken – 55% if taken as a lump sum and 25% if taken as pension income.
Remember that some pension providers allow arrangements to be split so that small pots can be taken, which are not Benefit Crystallisation Events (BCEs) and so do not use up any LTA. While an individual doesn’t need to have LTA available the option to take small pots can be limited to those with available LTA. It is worth making enquiries of the pension provider to see if they will facilitate this. A maximum of up to small pots of £10,000 each could be taken in this way, and therefore the value of the overall pension savings which is tested against the LTA can be reduced by up to £30,000. Furthermore, taking a small pot does not trigger the money purchase annual allowance.
Meanwhile, it is still possible to apply for Fixed Protection 2016 and Individual Protection 2016 which could provide a personal lifetime allowance of up to £1.25m, so this may be worth exploring. That said, if the small pots option is taken & arrangements are split this is classed as benefit accrual and would revoke Fixed Protection 2016 (FP16). And, it’s not possible to take small pots first and then apply for FP16 because the individual would not be eligible to apply for FP16… as they would have had benefit accrual since 5 April 2016. (The same principles apply for all other forms of Fixed & Enhanced Protection.) Neither does the small pots option work with scheme specific lump sum protection, where tax free cash can be greater than 25%.
Finally, note that there is no protection regime being introduced with the freeze on the LTA as there is no actual reduction in the LTA.
For Financial Advisers only. Not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at 8 March 2021 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.