The revised Lifetime Allowance - will this affect your retirement benefits?

At the risk of us sounding like a broken record, you may have noticed there have been some substantial changes made to pensions recently and this isn’t the first time that the Government has tinkered with pensions. 

This year marks 10 years since the introduction of ‘A-day’ - billed as ‘Pensions simplification’ - that implemented a range of rule changes surrounding how and when people retire and how they pay into pensions, with the aim of making pensions simpler and more straightforward. Sounds familiar doesn’t it?

In 2006, the Lifetime Allowance was introduced and this provided a limit against which a person’s individual pension benefits built up over their lifetime were tested. The cap was initially set at £1.5 million, rising to £1.8 million by 2011 with increases planned thereafter. At the time this meant that any benefits from pensions in excess of the Lifetime Allowance could potentially be taxed at a whopping rate of 55%.

Those fortunate enough to have built up a pension value in excess of this figure had the option to protect it by completing some new forms, but these protections naturally came with their own set of rules and some meant that no further payments or accrual under defined benefit pension schemes were allowed.

Unfortunately, the Lifetime Allowance only reached the heady heights of £1.8 million, but it then descended, reaching a point where in April this year it will be set at just £1 million, meaning that considerably more people may unwittingly be caught by the limit.

There is an expectation that some new protections will be made available, but unlike previous years the application process and final details will not be announced and made available until the Finance Bill 2016, which falls some months after the new level is set.

This could be particularly problematical for those who enjoy a high income and still wish to accrue benefits in a defined benefit (final salary) pension scheme and are automatically opted in to a workplace pension or make contributions after 6 April 2016, as they could sleepwalk into exceeding the Lifetime Allowance, or potentially cancel protections that has previously been put in place.

If you have a pension fund valued anywhere close to £1 million it is important that you seek professional advice from a regulated financial adviser sooner rather than later, in order to assess the potential options and impacts that the reduction in the Lifetime Allowance could have.

Our experienced, independent advisers are well placed to assist here so if you need help please contact a Financial Planning Consultant at any of Armstrong Watson’s 15 office locations.

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