The first point I always make to those considering what to do with their clients who are at, or near, the lifetime allowance is that it’s just that, an allowance.
Although there is a stand-alone tax charge if you exceed it, it isn’t frowned upon by HMRC and they aren’t going to start digging into your client’s tax affairs if they fund beyond the lifetime allowance. This is clearly understood in the advice community but it isn’t always well explained or understood by the pension scheme members.
We are often asked if the client should just deal with the charge now or crystallise to avoid it. The answer is it really all depends on their pension withdrawal strategy.
It rarely makes sense to crystallise and therefore bring the pension commencement lump sum into the estate without the need for cash.
Although it may feel to the client that they are going to pay less tax, it could in fact have the opposite impact, factoring in inheritance tax (IHT) as well in the long run. And, as we know, it doesn’t stop a test at age 75, and so withdrawals would be needed to avoid that charge, again possibly bringing un-required funds into the estate increasing any IHT issues they may have.
The other issue is when to stop contributing, which again is not a clear-cut answer. There can be many reasons to continue to pay into a pension when you are at or near the lifetime allowance, as well as reasons not to.
Employer flexibility can be a big issue. If the employer is willing to give up salary in exchange, this can be an option, however, beware of National Insurance deductions. The employer will not want to increase the cost to themselves so will likely recoup the extra costs. Think of it as a backwards salary sacrifice.
The individual will also be liable for their own National Insurance on the payment. Therefore, the pros and cons of this type of arrangement need to be clearly established before opting out of a scheme that may still be good value, even with a lifetime allowance charge.
It isn’t all doom and gloom, each case needs to be considered on its merits and Financial Planners are in the best position to look at it from all angles, helping to guide their clients to the right decision for them.
Claire Trott is director and head of pensions strategy at Technical Connection, part of St James’s Place Group, and chair of the Association of Member-Directed Pension Schemes (AMPS) - the SIPP and SSAS providers body.