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Case study: A costly LTA mistake

12 October 2017

Martin Tilley, director of Technical Services, Dentons Pension Management, describes how a non-advised action by a husband cost his wife her Lifetime Allowance protection

The role of a self invested personal pension (SIPP) operator is to provide the regulatory and legal structure of the SIPP as well as the administrative services needed to run it. SIPP operators do not provide regulated advice and as a result and as you would expect, the clear majority of our clients are introduced through regulated intermediaries.

We do however have an informative website and a good network of non-FCA regulated introducers such as accountants and surveyors. For their potential clients we can provide factual information about the product, processes and procedures and it is in this capacity that, from time to time, I see their non-advised potential clients.

The fact that these individuals are not utilising the services of a regulated financial adviser is always a worry, since their knowledge and expectations can be extremely low and high respectively. In many instances my involvement terminates with a recommendation that professional advice is sought. These cases demonstrate not just the need for advice but for the ongoing retention of an adviser.

Earlier this year, I was introduced to a couple who were property professionals. Having run their own property business for the last ten years, the wife had effectively retired several years previously whilst her husband continued part time earning a near six figure sum. Both were aged 49.

The purpose of the meeting was to discuss the potential for their respective pension arrangements to be consolidated into probably two SIPPs which would jointly invest in a commercial property which was currently tenanted by a third party and producing a rental yield of just over 6%p.a. The property was VAT registered but would qualify as a transfer of going concern; there was no borrowing requirement as apparently the value of the accumulated pensions more than covered the anticipated purchase price plus associated costs.

On initial inspection the proposal looked a viable prospect. The husband had been busy obtaining up to date values of the pensions which he was happy to share with me. He explained that they had consulted a financial adviser several years ago and he thought that their pensions were all “on track”. The report which was dated in mid 2014, indeed provided a full summary and snap shot of their accumulated pensions which totalled just under £1.3m, more than sufficient to cover the expected £1.1m total cost.

The disparity between the values of the pensions was my first concern and this was confirmed by the updated valuations. The wife, through her employments prior to their joint property business venture had the larger share with just over £900,000, the husband’s falling just short of £500,000. He went on to explain that the business was contributing to his own pension so that he would have parity with his wife, when they drew benefits sometime after reaching age 55.

I enquired if he was still receiving advice and was aware of the Lifetime Allowance (LTA) which I mentioned could be an issue for his wife. He explained that he had not felt it necessary to continue to use the services of the adviser since he preferred to manage his own funds and felt that he had “done quite well” but would consult an adviser before drawing benefits. It was here that the problem surfaced. I raised the issue of LTA protection and how that Fixed Protection 2016 (FP2016) which provides the individual with an LTA of £1.25m would be a useful safeguard.

A quick calculation revealed the wife’s pension with an expected return of 6% p.a. for the near 6-year period would already just exceed £1.25m, so FP2016 would be prudent and application could still be made provide no contributions had been paid since 5 April 2016. The husband went silent and after leafing through his files produced an informative newsletter from an accountant which he had received in early 2016 detailing how even a non taxpayer could obtain a £720 tax relief uplift on a £2,880 net pension contribution, turning this into £3,600. A frantic search of bank accounts revealed that a payment of £2,880 had been made to one of his wife’s pension on 28 April 2016 thinking this would augment his wife’s pension, but unfortunately making her ineligible for the LTA protection!

The fact that his wife may benefit from indexation of the current LTA of £1m before benefits come into payment is of scant relief since unless CPI inflation increases considerably, the expected fund value is likely to be subject to an LTA excess tax charge at some point before or on reaching age 75.

The client is now seeking advice on ways to mitigate any such tax charge in conjunction with holistic planning of how their pensions will sit with other personal assets as part of their retirement strategy.

 

 

 

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