In July the Treasury confirmed its decision to press ahead with an increase in the LTA from April next year, in line with inflation.
The LTA is a limit on the amount of money an individual can save in a pension fund tax free. If the accumulated value of the benefits drawn down from the fund is greater than this amount – whether by a lump sum or a retirement income – it would incur a large tax on the excess.
The LTA was set at £1m (£1.3m, €1.1m) on the 6 April 2016, having been reduced from £1.25m.
The UK Finance Act 2016 established that from the start of the 2018-2019 tax year in April the LTA will increase annually by the Consumer Prices Index (CPI).
The inflation figure for the month of September, which will be revealed tomorrow (Tuesday) by the UK’s Office for National Statistics, will be used as a benchmark for the increase.
This increase will be based on the rise in the CPI for the year to the September 2017, and where this is not a multiple of £100, it will be rounded up to the next £100.
Good things come to those who wait
“Although it may only be a small percentage increase, the rise in the lifetime allowance may have big consequences for some clients and mean substantial tax savings,” said Rachel Vahey, product technical manager at adviser wrap platform Nucleus.
The timing of taking benefits may be crucial in managing these clients’ tax charges, Vahey pointed out.
“These clients may want to consider delaying taking benefits until next April, as they may be able to cut – or even eliminate – the amount of tax they have to pay,” Vahey explained.
Tax on retirement?
Back in 2006/07, when it was first introduced, the LTA was implemented as part of a plan to simplify pensions and replace eight different tax regimes with a single figure that established the maximum tax-free amount someone could build up their pension towards.
During that tax year, the then-Chancellor of the Exchequer Gordon Brown set the allowance at £1.5m.
After rising steadily from £1.5m (in 2006) to £1.8m (in 2010), the LTA has been subsequently reduced in stages to £1m over the last five years.
There has been endless discussion about pensions tax relief over the past few years – varying from wholesale reform and moving to a pension Isa to the incessant chipping away at the allowance levels. whether that is the lifetime allowance or the annual allowance.
Some analysts have argued that, thanks to its reduction to £1m in April 2016, the cuts to the LTA have become a tax on the retirement funds of thousands of ordinary people.
Data from HM Revenue & Customs shows that the amount of tax collected by the taxman from pension savers exceeding their lifetime allowance rose 80% from £20m in 2014/15 to £36m in 2015/16.