Advisers will be kept busy in the first quarter of the year getting clients ready for the changes to the lifetime allowance, according to industry experts.
Claire Trott, divisional director for retirement and holistic planning at St James’s Place, said when it comes to implementing the abolition of LTA rules there will be plenty of conversations early next year as advisers prepare.
At last month's Autumn Statement the government confirmed it would be scrapping the LTA from early April, ignoring pleas from the industry for more time to prepare.
Instead there will be two key new allowances in place of the LTA.
These are:
- A ‘lump sum allowance’ set at £268,275 – This is the maximum someone can take as a tax-free lump sum (unless they have protection).
- A ‘lump sum and death benefit allowance’ set at £1,073,100 – incorporating both tax-free lump sums someone takes while alive and lump sums paid on death.
There are also a number of ‘transitional arrangements’ for those who have taken some benefits before April 6, 2024 and how those are taken into account in working out how much allowance an individual has remaining, if any.
Trott said: “With the publication of the regulations, there should be plenty of conversations to be had next year around the changes coming through in April, even though they were planned to only restrict lump sums in the same way they are currently.
“In the first quarter it will be a case of getting clients in the best position possible for the incoming changes.
“This could be a case of crystallising funds that are already over the lifetime allowance to avoid the additional tests on the remaining lump sums on death.”
She added: “Following the turn of the tax year, it will be important to review all client expressions of wishes in line with the change in the tests on death, considering the options surrounding tax free lump sums being limited, but not income payments from drawdown.”
Timing issues
But advisers have a tight timescale to work with as the regulations will come into force in a matter of months.
Stephen McPhillips, technical sales director at Dentons, said: “As has often been the case in the pensions industry in the past, providers will have a very, very tight timescale to work to, in order to make the necessary IT systems and administration procedures changes.
“Those providers who have invested in their own bespoke IT systems might be best placed to meet the considerable challenge which all of this presents.”
But he welcomed that the government has ditched plans to tax inherited pensions when someone dies under the age of 75.
The Autumn Statement confirmed income withdrawals taken by beneficiaries where the member died before age 75 will not be taxed.
HMRC had previously announced in the summer that those who died with uncrystallised funds before 75 and used those to provide beneficiaries with pensions through drawdown or annuity would be taxable.
“Had that been the case, it would have been an unwelcome and huge departure from the previous efficiency of pension schemes in relation to death benefits,” he said.
amy.austin@ft.com
