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According to the HMRC that 2% covers over 30,000 pension savers – roughly the average attendance at St Mary’s to watch Southampton. (I am not suggesting you can ignore this if you don’t have clients who support the Saints!)
The reality is that the actual number is closer to the turn out each weekend to watch top flight football both north and south of the border combined. And those affected clients have estimated pension funds worth around £250 billion. This is 28 times more than has been paid in transfers since the premier league was formed in 1992. Put like that it gives a sharp focus to the extent of the issue.
Last year’s Autumn Statement gave advance warning of a cut to the Pension’s Lifetime Allowance (LTA). The statement went on to say that 98% of pension savers will not have funds of more than £1.25 million.
With two new forms of protection for those impacted there was no great outcry or media fury. And why would there be?
Advisers were given 16 months’ notice to identify which of their clients were affected and to take appropriate action. This could be a case of putting the appropriate protection in place or merely advising them to carry on regardless and suffer the tax charge.
But it does mean identifying which of your client base forms part of the 30,000 with pension funds over new limit and those who might breach it in the future.
Just how close to the limit do you draw the line on which clients need to have this discussion before April? Well that depends upon how optimistic you feel about LTA being increased in the future.
The technical note which accompanied the Autumn Statement offered a clue to the future of the LTA. In the impact assessment it spoke of 360,000 becoming affected over the longer term. This is twelve times greater than those predicted to be immediately caught. So I think it is safe to assume that we will not see an increase anytime soon. And who would rule out further cuts?
Those in sight of retirement don’t need to have pots particularly close to £1.25M right now if the LTA remains frozen. Even if contributions are stopped – as would be needed for fixed protection – investment growth could easily see funds exceed the LTA.
This table shows the value of the current pension pot that could grow to £1.25M using various terms to retirement and a spread of growth rates (and assumes no further contributions are made):
Yes we’ve been here before – back in 2012 with the cut to £1.5 million and introduction of the first fixed protection. So it does feel a little like Groundhog Day, but this time without the sense of misplaced optimism that as markets recovered, so would the LTA.
With time running out to gather the valuations and projections needed to see which clients need to apply for protection before 6 April 2014. This years’ tax year end could end up just as hectic as the premier league title run in.
For more information on the Pension Lifetime Allowance changes visit www.adviserzone.com