Are you leaving the lifetime allowance charge to chance?

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Estimated reading time: 4 minutes

My favourite game of all time has to be Monopoly. I love it. When I play, I have to be the top hat and I have to buy Old Kent Road and Whitechapel Road. After that, I buy as many colour sets of properties as I can, so I can build houses and hotels on them and collect lots of lovely rent from the other players.

One of the problems with my strategy is that there is a ‘Chance’ card in the game, with the dreaded statement, “You are assessed for street repairs: £40 per house, £115 per hotel”. On more than one occasion I have been doing really well in a game, and then to my dismay I have picked that Chance card and had to hand over my well-earned savings to the Banker. In effect, I’ve been taxed for being successful.

To me, the lifetime allowance (LTA) charge for pension savings is akin to picking that Chance card in a game of Monopoly. For example, you and/or your employer pays contributions into your SSAS or SIPP - you invest the funds wisely, your investments do well - and when it is your turn to draw benefits, you cross your fingers and hope that your pension savings haven’t exceeded a certain level (the LTA) meaning that you don’t have to pay a LTA charge to HM Revenue & Customs.

The LTA is currently £1 million, and if your pension savings exceed this amount when you come to switch on your benefits, you could be liable for a LTA charge of either;

Income Tax will be applied to the pension payments at your marginal rate of income tax when you draw them. The good news is that the LTA will rise to £1.03 million in the 2018/19 tax year. The bad news is that this is the first time the LTA has risen in eight years, and it is nowhere near the £1.8 million amount that it was in 2011.

Whether you will have to pay a LTA charge may seem like a game of chance, but it doesn’t have to be. There are some ways you can take control of your pension savings:

If you have a valuable form of protection against some or all of the LTA charge, ensure that you do not inadvertently invalidate that protection. For example, you could lose ‘Enhanced Protection’ or ‘Fixed Protection’ by making a new contribution to a pension arrangement, or if your employer opts you into their ‘auto-enrolment’ workplace pension scheme and you do not opt-out in time.
If no pension contributions have been made to - and you have had no benefit accrual in - any pension arrangements since 5 April 2016, you may be eligible to apply for ‘Fixed Protection 2016’ and increase your ‘personal’ LTA to £1.25 million.
Consider the amount that you and/or your employer is contributing to your pension arrangement(s). If you think there is a chance that the value of your pension savings will exceed your LTA when you come to draw benefits, you may wish to consider reducing or stopping the contributions.
Consider the type of investments in your pension scheme, and the potential returns that may be achievable on them. ‘Conservative’ investments may be more appropriate if you wish to restrict the growth of your pension savings, so the fund values stay below the LTA.
Think about the timing of switching on your benefits from your pension savings. Once you have reached the minimum retirement age (currently 55), if the rules of your scheme permit, you may be able to access your benefits before the value of your pension savings exceeds the LTA. However, you also need to consider the death benefits that the scheme provides. For example, once you have taken your pension commencement lump sum (usually tax-free) and/or a pension payment, these funds will fall inside your estate for inheritance tax purposes.
If you have already drawn benefits, consider whether you should increase the amount of pension you are drawing from funds that you initially designated within your pension arrangement for future pension payments. A further LTA test may have to be carried out on your 75th birthday, and if these ‘reserved’ funds have grown above a certain level by that point, they could be subject to a (potentially additional) LTA charge.

We strongly suggest that you seek advice from your financial adviser before making any decisions. It is worth remembering that the LTA charge is only applied to any pension savings in excess of the LTA when you switch on your benefits. It may be that taking a chance that a LTA charge will have to be paid is the best option for you, taking into account your personal circumstances, and your plans for your pension savings; just like my strategy when I’m playing Monopoly.

Now, can anyone tell me how to win first prize in a beauty contest? When I play Monopoly, I only ever seem to be able to win second prize!