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Who’s afraid of the Lifetime Allowance?

When the Lifetime Allowance was introduced, in Finance Act 2004, it stood at £1.5 million.  It came with a promise that the allowance for each subsequent tax year would be an amount “not being less than the standard lifetime allowance for the immediately preceding tax year”.  I.e. the lifetime allowance would start at £1.5 million, and grow from there at an undefined rate. 

As we now know, the Lifetime Allowance peaked at £1.8 million in 2010.  From the 6th of April 2016 it will reduce to £1 million.  It will stay there for two years and, from 2018, start to increase with CPI.  
Advisers in 2005 could well have been excused for believing that the Lifetime Allowance, 10 years later, would be well over £2 million, and advising their clients accordingly.  HMRC subsequently moved the goalposts and, as a consequence, clients have had to protect their pension funds, and invest their money elsewhere.  
Dr Ros Altmann (before she was Pensions Minister) described the cut to the Lifetime Allowance as “really bad policy” and a “draconian change”.  She went on to say that she “would like to see the Lifetime Allowance abolished for DC schemes”.  
Should we, therefore, start planning on the basis that the Lifetime Allowance will indeed fall to £1 million, and then gradually creep up?  Or should we have faith that the Pensions Minister will stand by her guns, and push for its abolition?  How can we plan around these ever-moving goalposts?  Are we gambling with clients’ pension funds?
There’s a philosophical argument called Pascal’s Wager, which suggests that humans stake their lives on the existence of a god.  If you bet on your god existing and he does, your rewards are infinite; if he doesn’t, your losses are minimal.  If you bet on your god NOT existing and he does, your losses are infinite (i.e. you go to hell).  As a result, believing in god minimises the chance of loss.
The same could be applied to the Lifetime Allowance, except the stake is not your life but, worse, a hefty tax bill!  We have to work on the assumption, in the short term, that HMRC will be true to their word in order to avoid “infinite losses” (i.e. LTA charges).  Believing in the Lifetime Allowance (at least for now) minimises your chance of loss.
The most important aspects to pension planning are good projections and regular updates.  A good piece of Cash Flow Modelling software allows you to see how much your client’s pension fund might be worth at retirement, and to apply current legislation.  
If legislation changes, it can have significant impact on a client’s ability to fund their desired lifestyle in retirement.  Regular client meetings give you the opportunity to ensure that your client is making the most of the current rules: paying only the tax that they need to pay and, more importantly, getting the best out of their retirement.

Adam Leci, Technical Support Consultant, Prestwood Software



Author: Philip Calvert
Posted: Thursday, December 03, 2015 | 9:34:11 AM

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