Standard Life believes the reduction in the lifetime allowance (LTA) to £1.25m provides financial advisers with a unique opportunity to broaden their higher net worth clientbase by demonstrating the value of their advice on this complex pensions tax issue.
The group has estimated that the reduction in the allowance will hit far more than the 1% of pension savers originally envisaged when it was introduced. It has calculated that more than £250bn of accumulated pension wealth could be impacted. HMRC estimates that 30,000* people will be immediately affected by next April's LTA cut, with 360,000* expected to break this limit over the longer-term.
From 2014/15, the LTA will be lower than when it was introduced in 2006. Financial advisers must cater for the realistic possibility that the allowance will be frozen for the foreseeable future ? and might even be cut again. This could radically change the retirement strategies used by wealthier clients.
Alistair Hardie, Head of Customer Consolidation at Standard Life, said: “These people face the difficult decision of whether to protect their existing pension benefits and stop pension funding, or carry on contributing and face a tax charge. And the clock is ticking for many. The two new options to lock into a higher allowance which have been introduced, while welcome, serve to complicate decision making for clients ? decisions that many will not even realise are crucial to their future retirement planning strategy. And making the wrong decision could potentially expose up to £250,000 of their pension savings to a 55% tax charge. Expert financial advice is the essential component to achieving the best possible outcome for them.
“While the £1.25m limit may not set alarm bells ringing for other clients just yet they have to take into consideration that investment growth can quickly accelerate the size of the pension pot that could ultimately lead to a client’s fund exceeding the LTA. These changes could radically alter the retirement strategies advisers have in place for their wealthier clients.”
“The solutions available to clients in relation to the LTA are not clear cut. Those eligible for individual protection have nothing to lose but a person must be over the £1.25m allowance to register. Registering for fixed protection will preserve the existing £1.5m allowance but means giving up future pension funding. This is a much tougher decision, especially if it means losing out on valuable employer contributions.
“Doing nothing, or making the wrong decision, could potentially cost a client £137,500 in tax. But for some clients staying in their employer scheme and paying the tax charge might be the right decision, particularly if there are no other offers on the table from the employer should they leave the scheme. There’s a real communication challenge to raise client awareness of the issues and avoid them sleep-walking into a tax charge. But get it right and word of mouth could bring the issue to the attention of others, many of whom will need financial advice for the first time.”
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