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Investors with large pension pots are delaying retirement until the new financial year to avoid hefty tax charges amounting to hundreds of thousands of pounds, say advisers.
Surprise measures announced in this month’s Budget removed the threat of tax charges of up to 55 per cent on savers accessing pension pots bigger than a £1.073mn lifetime limit.
The unexpected scrapping of lifetime allowance (LTA) charges from April 6 by chancellor Jeremy Hunt spurred some savers into immediate action.
“After the Budget, we saw an increase in people cancelling requests to crystallise their pensions,” said Rachel Vahey, head of policy development at investment platform AJ Bell. “Many people have been delaying to avoid triggering an LTA before the charges are scrapped on April 6.”
The chancellor’s move has been a bonus for those with bigger pension pots who were preparing to take a big tax hit.
Currently, benefits above the LTA can face tax charges of 55 per cent if taken as a lump sum or 25 per cent if taken as income.
Andrew Tully, technical director with Canada Life, a pension provider, described the case of a customer spared hundreds of thousands of pounds in LTA tax charges.
“We had one pension transfer that was due to go through this week which would have incurred a £400,000 LTA charge had it gone through,” he said. “They have now delayed the transfer until after April 6.”
The finance bill, published after the Budget, also brought clarity for people who had previously taken out LTA protections, which had restricted them amassing bigger pensions.
In the aftermath of the Budget, there was uncertainty over whether those with enhanced or fixed protection could resume pension saving from April 6, when LTA tax charges were lifted.
HMRC guidance this week clarified the rules for pension savers with these existing protections.
“They will be able to recommence contributions in the new tax year without jeopardising access to a higher tax-free cash lump than the new capped amount of £268,275 [25 per cent of £1,073,100] being introduced,” said Jason Hollands, managing director of wealth manager Evelyn Partners.
“For those with fixed protection 2012 in place — which protected an LTA of £1.8mn — they will be able to take a maximum tax-free cash lump sum of £450,000,” he said.
“Those with fixed protection 2014, protecting an LTA of £1.5mn, will be able to take a maximum tax-free cash lump sum of £375,000 and those with fixed protection 2012 — at an LTA of £1.25mn — can take a maximum tax-free cash lump sum of £312,000.”
Hollands added that it was also likely that many people with enhanced protection would already have taken their tax-free cash.
Christine Ross, client director at Handelsbanken Wealth & Asset Management, agreed that the finance bill had provided some valuable clarity for those who now wished to revive their pension contributions.
“Many employees will have opted for a cash allowance offered by their employers as an alternative to pension scheme membership,” said Ross.
“Not only will those individuals now be able to apply to rejoin the pension scheme but they may also be able to make additional contributions by carrying forward unused annual allowances from the past three years.”
However, for the highest earners, the tapered annual allowance would considerably limit the scope for future pension contributions.
From April 6, the tapering rules apply to those with adjusted incomes of more than £260,000, but they can contribute £10,000 from the new tax year, as opposed to the £4,000 under the current rules.
Investors who triggered a lifetime allowance charge just before the Budget may have an opportunity to reverse this, if they open a drawdown plan to access their benefits, say advisers. This is because some policies have a 30-day cooling off period, allowing a product purchase to be cancelled.
In spite of Hunt’s efforts to make pensions more attractive, advisers say political uncertainty means many will hold off from taking advantage of the new limits.
The Labour party has already pledged to reverse the LTA change if elected in next year’s general election.
“There’s nervousness about the potential changes a Labour government will make,” said Harry Bell, director of financial planning at investment manager Charles Stanley.
“Savers have the full tax year through which to make contributions so they don’t need to dive in straight away. There’s no harm in making sure what the financial planning priorities are and having a real handle on the potential implications of those options, given the political uncertainty.”
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