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Mitigating tax charges if the Lifetime Allowance increases

11 September 2017

Advisers and paraplanners must prepare for an increase in the Lifetime Allowance next April, if the September inflation remains high, as timings could prove crucial in managing clients’ tax charges, according Nucleus.

The wrap platform says the decision to raise the lifetime allowance after years of lowering it could mean substantial tax savings for some clients, and some may wish to delay taking benefits until next April.

Rachel Vahey, product technical manager, Nucleus, says: “After five years of chipping away at pensions tax allowances, the lifetime allowance will reverse direction and start to increase from April next year in line with inflation. 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.

“Advisers will need to work with their clients, who are thinking of taking benefits over the next few months, and for whom the lifetime allowance may be an issue.”

After rising steadily from £1.5 million in 2006 to £1.8 million in 2010, the lifetime allowance was subsequently reduced back to £1 million. In a surprise u-turn, the Treasury confirmed in July its decision to press ahead with an increase in the lifetime allowance, going against industry predictions that there would be further reductions. The rate used for the increase will be the September inflation figure.

Vahey notes that as the amount of any benefits taken when tested against the lifetime allowance is expressed as a percentage of the allowance, clients who decide to delay taking benefits until after April will use up a smaller percentage of their allowance, giving themselves additional “wriggle room” and possibly reducing any lifetime allowance charge they have to pay.

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