The lifetime allowance was shot down in a glorious budget day in March with thunderous applause to all who were likely to be negatively impacted by the regime.  The fallout since may lead to new planning avenues that have previously been discounted and as such the following are some comments made by clients in meetings we have held since budget day.

Should I contribute and rescind my old, protected lifetime allowance?

Yes and no!  The current tax-free cash regime is governed by the lifetime allowance and so if you have fixed protection of a higher amount, you will currently be able to draw tax free cash of up to 25% of that level.  If you contribute first and lose your old protection your tax free cash will drop to 25% of the old £1.073M lifetime allowance.

Bearing in mind you can still apply for fixed or individual proportion 2016 at a lifetime limit of £1.25M, take care of not discounting this, as to do so can see your tax-free funds drop significantly in potential.

I’m over 75 should I start contributing?

You can make or receive pension contributions if you are over 75 but you won’t get tax relief.  This is because you fail an eligibility criteria test that you must be under age 75 to pass.

Making contributions past age 75 will not have seen them tested against the lifetime allowance anyway pre-budget and so won’t post budget.

Contributions to pension funds are outside of your estate for inheritance tax and so this can be an interesting strategy but if you don’t get tax relief going in and need to draw against it in the future, you could be paying income tax to draw the funds!

Should this rule change alter how I draw my pension?

It certainly could do.  Assume that pre budget your pension fund was over the lifetime limit and you took full tax-free cash and then left the excess fund to accumulate thus avoiding the penalty tax charge of 25%.  You then would be drawing income from the part of the fund designated to pay pension, known as the crystalised fund.

Moving forward, you can now switch these withdrawals to your uncrystallised fund and pay the same income tax as you were doing under the crystallised fund.

If the lifetime allowance remains dead, this planning does not affect you at all. But if it comes back, you will be making small wins against penalty tax charges each time you withdraw.

What happens when I die?

Well, in short if you die older than age 75 these changes don’t matter.  Your beneficiaries simply pay income tax when they draw from your pension fund.

Dying younger than 75 and you won’t be paying any excess lifetime allowance tax, which is good.  There should also be no tax if you simply pass your pension fund as a pension fund to your beneficiaries.

But, there was a newsletter written by HMRC which stated they wanted the excess fund above the lifetime allowance to be taxed as income when being withdrawn but this was quickly retracted and is now under consultation.  It may end up that any excess pension fund passed over in death before age 75 has two elements.  One to be drawn down income tax free and one to be taxed as income tax on the recipient.

One thing is still certain is that inheritance tax does not apply, still!

Don’t panic.

There are a lot of kneejerk reactions and scepticism when big changes are made to pensions and indeed this is a big change.  Don’t panic but do seek out advice that has experience in this world.

As private pensions have a history dating back to the 1960s and have seen plenty of rule changes, I would advise you to seek advice from a professional with in depth knowledge of all this time as you never know when that old policy from your 1980s employment may have a hidden gem of high tax free cash if left alone.

Thanks for reading and

Enjoy the journey!