Looking at pensions planning, over the last few years we have seen governments passing new legislation that has brought in unprecedented changes in a 'fast and furious' fashion; so much so that the industry has struggled to keep pace, and clients are increasingly at a loss to understand what is happening.
The changes have included:
- Pension simplification introduced from April 2006
- Workplace pension responsibilities affecting employers and employees from October 2012 onwards
- New pension freedoms giving greater choice to clients than ever before, from April 2015
- Changes to the lifetime allowance every year since 2006/07, culminating with the reduction to £1,000,000 which applies from 2016/17.
The lifetime allowance is a good example of the pace of change. It often means clients are left struggling to keep up:
|Tax year||Standard Lifetime Allowance|
The lifetime allowance is the maximum anyone can build up within a pension pot in the course of their life, unless they have transitional protection, without suffering a tax charge (known as the ‘lifetime allowance charge’) when they take benefits. In the latest in a series of cuts, the Government has reduced this limit to £1 million, down from £1.25 million.
While this sounds a large sum, it would today only buy a £21,100 index-linked annuity for a 60-year-old.
Those with salary-linked pension, also known as “final-salary pensions, or “defined benefit” pensions, have slightly more generous arrangements. Even so, anyone with an annual pension of more than £50,000 will breach the ceiling.
Steps can be taken to protect slightly more than the £1 million ceiling if you already have significant savings, but the rules are complicated, even for those due to retire shortly. They are almost unfathomable for younger workers.
According to The Telegraph, employees are stopping saving into pensions, and sometimes even retiring early, because they fear they will be penalised by punitive taxes following the latest cuts to the lifetime allowance.
The latest reduction in the allowance could land 55,000 individuals with potential tax bills averaging £137,500 over the next 12 months, according to Standard Life.
Although the tax applies only to the part of the pension fund in excess of the limit, many people do not seek returns where they fear they will lose as much as 55% to tax.
Investors may feel they have to switch from higher-growth assets such as shares to cash in order to limit their portfolio’s future growth.
Clients read the high level headlines but financial advisers know that the devil is in the detail. They may not appreciate it fully but clients now need advice more than ever.