The latest from our Scottish consultancy team, based in The Capital Building on Edinburgh's St Andrew Square
The Lifetime Allowance (LTA) is an element of pension planning that tends to create two distinct groups of pension savers:
Group One: Those who have never given it a second thought (if they have heard of it at all)
Group Two: Those for whom it has a clear impact on their personal tax and retirement planning.
The LTA is the maximum amount of registered pension savings that can be drawn from pension schemes without triggering an extra tax charge.
That extra tax charge can be as much as 55% of the excess!
Currently, the LTA stands at £1,073,100, and this is likely to be the case for the foreseeable future.
The Chancellor has just frozen it at this level for the next five years, along with the Inheritance Tax Threshold, which has been frozen since 2009…initially only a one year freeze…then another four year freeze…then…well you get the idea.
Undoubtedly, £1,073,100 is a significant sum, but if for a moment we plan for the possibility that this initial freeze may last longer than announced, the goalposts are moved a little...or not as the case may be.
As a pension consultant (and unfortunately one who is too young to have any Final Salary/Defined Benefit pension savings) I have always felt that I was unlikely to get anywhere near the LTA personally, and have been comfortable highlighting to most clients that it was likely only an issue to be considered by senior employees, high earners or those with significant defined benefit pension entitlement.
To explain why I might need to re-think that, let’s look at a couple of examples.
If the LTA increased by an average of 2% each year, the UK’s target inflation level, after 40 years the LTA would stand at £2,369,447.
To “catch up” with that projected lifetime allowance, a saver with no existing savings would need to:
- Start with monthly contributions of around £550
- Increase these each year by 2%
- Achieve an average return of 8% after charges
- Keep doing it for 40-years
The average pension scheme member is unlikely to achieve that level of saving, therefore placing them in that first group we mentioned, where they will probably never give it a second thought.
However, now the goalposts have stopped moving, they may need to think again.
To exceed the current LTA, that starting contribution of £550 a month reduces to a much more “average” and achievable £250 a month.
In fact, as the average salary for a full-time role in the UK in 2020 was £38,600 (ONS Average Household Income Report) – based on the current legislation and the most common method to meet automatic enrolment requirements used by our clients, that salary would likely result in an auto-enrolment pension contribution of 9%, or £289.50 a month.
This is of course an extreme example, and it’s hugely unlikely that the LTA will be frozen for 40 years.
It does though illustrate the point that, as it turns out, group one might need to give the LTA a second thought after all, and as an employer you will likely want to support them in doing so.
Do get in touch and we will be more than happy to help.
The second group I mentioned, those senior or high earning employees, and those with defined benefit savings, will also need to make some potentially very significant adjustments to their pension planning. I’ll explain why and how you can support them best in my next blog.
If you would like to speak with one of our advisors, please get in touch: email@example.com.