Thanks to of M&G’ Kirsty Anderson for this helpful explanation of why it’s so touch being wealthy
It seems that scrapping the LifeTime Allowance has led to the emergence of three more “allowances”, which of course aren’t allowances but restrictions on the wealthy from being getting away without paying tax on their wealth.
Kirsty outlined three new allowances that savers will need to understand following the end of the LTA next year:
- The lump sum allowance.
- The lump sum and death benefit allowance.
- The overseas transfer allowance.
The lump sum allowance
The tax-free lump sum allowance (LSA) after 6 April has been set at 25% of the pension up to a limit of £268,275 – equivalent to 25% of the current LTA threshold. There is an overall limit, tested on death, of £1,073,000, which is known as the lump sum and death benefit allowance, the same level as the current LTA.
In the Autumn Statement, the Chancellor confirmed that if a saver had used 100% of their LTA, their new allowances would be exhausted. In addition, a partially used LTA will have an impact on the benefits savers can access.
Savers (and their advisers) will be able to access a calculation method, expected to be disclosed in draft legislation published for the LTA abolition next week, to understand the allowance that can be used. For savers able to obtain previous records of tax-free amounts received, an alternative transition calculation may be available.
Industry experts agree a calculation shouldn’t make the transition too onerous, but it may be more complicated for savers who have taken pension benefits over the years since the LTA was introduced. Clare Moffat, head of technical at Royal London, said a lot depends on how the system is designed.
‘There are some complicated scenarios but that’s a small percentage,’ she said. ‘It remains to be seen whether [the government] provides a simplified [system] or a more complex one to deal with the various scenarios out there.’
Claire Trott, divisional director at St James’s Place, also said the transition period would be more complicated for savers who have taken benefits at various stages.
‘Anyone who hasn’t taken any benefits before and will start taking benefits next year will be relatively easy to deal with, but for those who took benefits throughout the past decade at various points and plan to take more, that will come back to bite [them],’
Another group of savers who will have different rules for their lump-sum are those with enhanced LTA protection. They will retain any rights to a higher tax-free lump sum allowance that came with the protection.
For savers with scheme-specific LTA and tax-free cash allowances, more clarification is needed in the finance bill about the benefits they will have access to.
The lump sum and death benefit allowance
Since the LTA announcement, it has been rumoured that dependant, nominee and a successor’s flexi-access drawdown would be taxed.
Currently, any inherited income payments are income-tax-free if the person who died was under 75. Income payments and lump sums taken by beneficiaries, if the person died at age 75 or over, are subject to the beneficiary’s marginal rate of tax.
The government , in the autumn statement, confirmed that beneficiary drawdowns would remain tax free if the person died under 75. Policies will also remain the same for those who die aged over 75. This announcement will have come as a relief to advisers, who use pensions as a means to mitigate inheritance tax.
‘It’s great from an income perspective. [Taxing drawdown benefits under 75] would have been a significant change in legacy planning for advisers and clients,’
said the ubiquitous Kirsty Anderson.
Asked why the government may have rowed back on the rumoured decision to tax under 75 beneficiary drawdowns, Anderson said it was unlikely the policy would have significantly increased income tax receipts.
‘You can see why [the government] would do it, but the reality is more of us are living beyond the age of 75, so how much income tax would it actually generate? I can’t imagine it would be hugely significant,’
Sceptics might ask why so many transfers from DB schemes have been made – with “reason why” letters quoting this tax entitlement.
The overseas transfer allowance
For savers intending to transfer a pension into an overseas scheme, the government yesterday introduced an ‘overseas transfer allowance’.
This allowance of £1,073,000 will officially replace the LTA. Any amount transferred over the allowance will be taxed at 25%.
Some industry experts believe that the overseas transfer allowance will not count towards a saver’s lump sum death benefit allowance. There is some thinking double bubble allowance will be on offer. Kirsty Anderson is on it again
‘We think people will have their overseas transfer allowance and their lump sum death benefit allowance meaning, theoretically, you could transfer your £1.073m abroad and still have your £1.073m here,’
Tough – but maybe not that tough. Tbe best way to avoid capital taxes is to pay income tax on your pension in payment.
