11th January 2016
Customer calls on the Lifetime Allowance (LTA) surged fourfold in the latter half of 2015 as consumers begin to take action ahead of the April deadline, numbers from Fidelity International have shown.
With the LTA, the limit on the value of payouts from your pension schemes, which can be made without triggering a tax charge set to fall from £1.25m to £1m, customer calls grew steadily through October with volumes ending the year at levels four times higher than those at the beginning of the quarter.
Fidelity saw a steep increase in people taking action to avoid a potential tax bill of up to 55%.
In December, nearly one in seven, at 13%, of customers used their tax-free cash to trigger their assessment against the LTA under current rules as opposed to the new ones. Being the second most popular reason for people accessing their pension, this compares to previous months where not one customer had sought to use their cash in such a manner.
|TFC usages – to lock in the LTA (%)|
Source: Fidelity Retirement Service
Richard Parkin, head of retirement at Fidelity International, said: “What we’ve seen in December is a move from asking questions to actually taking action which is to be expected given the Autumn Statement gave no respite. Indeed, we expect to see more and more customers seeking to access benefits to limit any potential tax bill come April.
“Yet, it’s essential that people avoid ‘knee jerk’ reactions. Some common misconceptions are that to avoid the LTA, one should just move into cash. You can see the thinking but it’s not the best option – yes, you will pay extra tax on growth over the new threshold but it’s better to have 45% of something than 100% of nothing. Similarly, some may be tempted to stop making contributions to avoid compounding the problem but if this means losing an employer’s contribution this may not be a sensible option.”
Parkin however urged that it is more important that people who could be impacted seek the relevant help to get the best plan to fit their long term goals and risk preference.
“While the LTA calculations are fairly simple theoretically, they are often complicated by multiple pension arrangements which can be quite difficult for most people to work out. We would urge anyone concerned to seek the appropriate expert help if they are in any doubt and not make any quick and potentially costly decisions,” he added.