Brexiteer Lord Bamford has waded back into the political debate, accusing the Government and lobby groups of ignoring the millions of small businesses that form the “backbone” of Britain.
In a rare interview, the boss of manufacturing giant JCB told The Sunday Telegraph that senior politicians could have anticipated the UK’s vote to quit the European Union if they had listened to views of the country’s 5.4m private and family-owned firms. He also launched a fresh attack on the CBI, calling the lobby group a “waste of time”.
“The CBI is a waste of time, it didn’t represent my business or private companies,” he said. “I didn’t agree with its view on Europe.” He claimed the lobby group – and others like it – failed to promote the interests of private and smaller businesses.
“The CBI really only represents 20 companies in my view and they are multinational and not British – something like Unilever, Royal Dutch Shell,” he said.
In his support of Brexit, the peer said he represented the opinions of a huge silent majority. He admitted his stance had made him unpopular with many leading figures in commerce and the Government but addded he was “not the tiniest bit surprised” by the 51.9pc vote to quit the EU.
“Politicians and civil servants glass over when you talk about SMEs and yet they are the backbone of the country,” Lord Bamford said. The CBI hit back, saying it “speaks on behalf of 190,000 businesses of all sizes, which together employ nearly 7m people, a third of the private sector”.
“Any suggestion that the CBI doesn’t represent the diversity of British businesses is patently false,” a spokesman said, adding its president, Paul Dreschler, “chairs one of the UK’s leading family businesses”, the shipping to finances group Bibby Line.
But Lord Bamford’s views were backed by John Longworth, the former director-general of the British Chambers of Commerce, who quit the body in March after saying UK businesses had a “brighter” future outside the EU. “Membership of organisations like the CBI is mostly federations rather than individual businesses,” said Mr Longworth, who is now co-chairman of campaign group Leaves Means Leave.
“They are bureaucracies or big corporations with no particular loyalty to the UK or British people.” The Federation of Small Businesses, which has successfully campaigned on several issues in the past year, including reducing business rates and National Insurance costs for members, said: “Our membership was split down the middle on the Brexit question.”
There are two restrictions on how much you can save into a pension and still receive tax relief on your contributions - the annual and lifetime allowances. If you go over these limits you will face a tax charge.
The annual allowance is currently £40,000 a year - but it could be far less if you are a high earner because of the new "taper".
This has applied since April 2016 and sees the amount you can in a year cut the more you earn.
Jessica List, a technical specialist at Sipp firm Suffolk Life, said this was “one of the most complicated things ever introduced around the annual allowance”.
To work out whether you will be affected you need to calculate a “threshold” and “adjusted” income.
If your threshold income is more than £110,000 and adjusted income is more than £150,000 a year you will be caught and start to see your annual allowance drop from £40,000 to a minimum of £10,000.
Threshold income includes income from all sources, not just your salary. Income produced by investments and buy-to-let properties fall within the scope.
The taper is one of the most complicated things ever introduced around the annual allowance
You also have to add any income given up in a salary sacrifice arrangement, used by many employers to lower National Insurance bills, if it was set up after July 8 2015. From this deduct pension contributions you made to personal pensions, such as Sipps, and to workplace pensions.
If you have received a lump sum from someone else’s unused pension on their death, this is not included.
If the figure produced is less than £110,000 there is nothing to worry about – your annual allowance will be £40,000. If it is above, however, you need to calculate adjusted income.
The Government estimates that 300,000 people who save into pensions will be in this situation.
Adjusted income is calculated in much the same way as threshold income but includes the pension contributions that you and your employer make both from gross pay and via salary sacrifice.
If adjusted income totals more than £150,000 the taper applies and your annual allowance will fall by £1 for every £2 of adjusted income between £150,000 and £210,000. For adjusted incomes of £210,000 or more, the allowance will be £10,000.
However, using what is known as “carry forward”, you will be able to claw back some extra allowance if you have some left over from the previous three tax years. HMRC automatically tops any contributions up by 20pc, but higher and top-rate taxpayers need to claim the extra tax relief through their tax return.
If you have accessed your pension pot using the pension freedom rules introduced in April 2015 your annual allowance is automatically cut to £10,000 and carry forward cannot be used.
However, if you make your withdrawals using a “capped drawdown” plan set up before the freedoms took effect, your limit remains at £40,000.
If you do exceed the limits, HMRC will impose a charge at your marginal rate of income tax.
Reinvesting your pension money is a sneaky way to boost your pot - we explain how it works
Now that savers aged over 55 can access their pension savings in one go, tens of thousands of older people are choosing to take cash from their retirement pot to spend on anything from debt repayments to round-the-world cruises.
For those in the know, a number of attractive loopholes also come into play, which – if used smartly – can be used to increase your income in retirement.
One of the best things about pensions is the attractive tax relief you get when you pay into one. You can carry on benefiting from this even when you’ve retired, although only with strict caveats.
If you’re going to “recycle” your pension money you must do so with extreme caution. If you fall foul of the rules, you could end up with a huge tax bill instead of a small one.
Here we answer common questions on how you can “recycle” your pension money.
How does recycling work?
The theory of recycling is that investors pay into their pension and therefore benefit from the tax relief (paid at the taxpayer’s rate of 20pc or 40pc), and then immediately withdraw the money. It’s a neat turn, all executed at no risk to the saver and entirely at the taxman’s expense.
For every £1,000 paid into the pension of a basic-rate taxpayer, £200 (20pc) comes from the taxman. So your £800 cheque benefits from an instant 25pc (£200) boost.
And if you’re a 40pc taxpayer, there’s even better news: the instant returns you can get just by funnelling some money into your pension are even greater. This is because for every £1,000 paid into the pension of a higher-rate taxpayer, £400 (40pc) is paid by the taxman. So your contribution of £600 is boosted by just over 66pc (£400).
The only slight annoyance is that you must claim back higher-rate tax relief on pension contributions by filling in a self-assessment form, whereas basic-rate tax relief is credited automatically by your pension scheme.
How much can I safely recycle every year?
If you’ve got a “capped drawdown” arrangement that you took out before 6 April this year, and you withdrew at least a penny from it as pension income before that date, you’ll be able to continue investing up to £40,000 a year into it – the normal “annual allowance” for pension contributions.
If you have a capped drawdown pension and you haven’t yet taken any money from it as pension income, you’ll have lost the higher £40,000 limit and you’ll be allowed only the new limit of £10,000 a year. Likewise if you have a “flexi drawdown” arrangement set up after 6 April this year, you’ll be allowed to contribute only £10,000 a year into it in future.
You can contribute only as much as you earn in any given year. Income from your pension unfortunately doesn’t count towards this.
I’m retired and not working. Can I still recycle?
Yes. Say you are over 55, have finished work and are living off savings. You can still invest up to £2,880 per year into a pension, attracting basic-rate tax relief by doing so. This will bring your total pension contribution up to £3,600, giving you a 20pc return on your money.
The money can be withdrawn right away, depending on the terms applied by your pension provider. The first 25pc (£900) is tax-free, and the rest is taxed as income.
Remember that you can earn £10,600 in the current tax year without paying tax, so if you’re a non-earner you’ll be able to take the whole lot without paying any tax. You can repeat this once a year.
I’ve heard I could be taxed at 70pc if I recycle too much. Is this right?
Yes. Since the freedoms were introduced, a number of retirees have decided to use all or part of their pension cash to increase their ongoing pension contributions either directly or indirectly. One common way is to pay off debt and then use the income released (the money you previously used to make regular debt repayments) to pay more into your pension.
This may sound like good financial planning but it’s surprisingly easy to fall foul of the recycling rules. A little-known quirk could result in your original withdrawal being treated as unauthorised, which can incur a tax charge of 70pc.
Two things must happen for your withdrawal to count as unauthorised. First, the tax-free cash you took in a particular tax year has to be more than £7,500. Second, your pension contributions over five years have to be more than 30pc of the value of your tax-free lump sum. The five years that matter are the two years before the withdrawal, the year of the withdrawal itself, and the two years after it.
You don’t even have to make the contributions yourself for them to count; even if they are paid by someone else, such as an employer, they will count against you.
How is the 70pc tax calculated?
If your contributions failed the two tests outlined above, the whole of your tax-free cash would be deemed to be an unauthorised payment.
The withdrawal would trigger an unauthorised payments charge of 40pc and possibly another fine called an “unauthorised payments surcharge” of 15pc. Your pension scheme would then be charged a “sanction charge” of 15pc, bringing the total to 70pc.
The successes and failures of the radical overhaul made to Britain's pension regime in 2015 are coming to light as a committee of MPs calls for evidence in an effort to ascertain whether the "freedoms" are working.
Finance professionals, charities and members of the public have submitted views to the Work and Pensions Committee's "Pension Freedoms Inquiry". The evidence paints a broad picture of how the reforms are being used.
The freedoms were introduced two years ago and allow those over the age of 55 to take their entire pension pot as a lump sum, with the first 25pc tax-free as usual and the rest taxed as if it were income.
Before the reforms, the vast majority of pensioners would purchase an annuity which guaranteed an income for life. The reforms were announced in 2014 and effective from April 2015, since when hundreds of thousands have accessed their pot.
George Osborne, the chancellor at the time, described the move as creating choice and freedom as to how pensioners receive their money, but some voiced concern over how the money would be used. Now written evidence to the committee paints the clearest picture so far of what people are doing with their cash.
There are horror stories...
The most alarming evidence came from Pamela Hewitt, who drew her submission from her experience working as a welfare benefits officer for a social landlord.
One of her clients spent £120,000 of his pension pot on “gambling, a car and alcohol", she said. Ms Hewitt wrote that this individual had held a lucrative engineering job until he was made redundant, his house was repossessed and he fell into a spiral of depression.
His benefits had been stopped due to his savings, including a pension, but once this was investigated it was discovered he had spent all the money. He later released a further £20,000 from his pot against the advice of his accountant.
Ms Hewitt writes that his pot was originally worth £250,000 and the man had drawn on as much as possible, paying very high rates of tax in the process.
She continues that he had been suffering through a period of ill mental health.
“If Mr A had not been able to access his pension pot I can only assume that the years leading up to retirement would have been more stable, as prior to him having access, and following his having spent it all, he has been a stable and ideal tenant,” she wrote.
“I think he chose to spend his money, not to take advantage of the benefit system, but because he didn’t care what happened to him, had addiction issues and knew there would eventually be a safety net.”
A senior local authority official warned that councils could use “deprivation of capital” rules to block benefits payments for people who choose to deplete their entire pension pots intentionally in this manner. This could create huge burdens on charities and Government.
Ms Hewitt recommended that advisers be obliged to inform clients considering taking their cash of the deprivation of capital rules.
...but many people have benefited
One man, who withheld his name, told the inquiry he had boosted his projected retirement income by using his pot to purchase a small property to rent on Airbnb. The 60-year-old had a relatively modest pot of £46,000 which he withdrew a year ago.
He bought a "shepherd's hut" and earned an income of £6,000 last year. He told the inquiry his pot would have purchased an annuity worth £1,600 a year so his projected retirement income has gone from £14,744 to £18,769 - a 30pc increase.
“Pension provider (Aviva) were fine – very professional about checking I had taken advice before drawing down. No pressure from anyone,” he wrote.
“No one contacted me to sell me any risky investments. This is the only decent thing George Osborne ever did.”
Another person, who also withheld their name, took a portion of his pension pot early in order to get round the “lifetime allowance” for his pension. He said once investment growth was taken into account his pot was likely to breach the allowance within five years.
Taking the money warded off this possibility, as the value is calculated at certain “crystallisation” events. He used the money to buy a boat.
The pension freedoms tax glitch
One downside which also comes out in submissions to the committee is a tax glitch which has left tens of thousands waiting for their money.
Because HM Revenue & Customs calculates income tax liability on a monthly basis, those taking a large lump sum have been taxed at the higher rate, even if they will have no other income for the rest of the year. This has meant they have been forced to wait for months to get their money back.
Telegraph Money has campaigned for this issue to be fixed. The man who bought the shepherd’s hut said he had been forced to pay higher tax and said his experience with HMRC had been "the only negative throughout the entire process".
Once seen as a last resort, the use of specialist, later-life mortgages is increasingly common among well-off homeowners keen to fund “living inheritances” and avoid death duties.
The proportion of £500,000-plus properties being used for “equity release” – as this borrowing is generally termed – has risen at some specialist firms by as much as three times since 2012.
In part this surge has been driven by the booming housing market, particularly in London and south-east England.
However, the growth in the value of the average property used to withdraw cash using equity release or “lifetime mortgages” has far outstripped national house price rises – suggesting that equity release is going “upmarket” as wealthier people embrace it as a broader financial planning tool.
House prices across the country rose by an average of 12.6pc between 2014 and 2017, according to figures from Nationwide Building Society, compared with a 26pc rise in the value of the average house used for equity release (see graph below).
“The increase in the numbers of wealthier, older homeowners extracting cash from their homes through equity release is testament to the fact that those with considerable property wealth are looking to utilise it,” said Dean Mirfin of Key Retirement Solutions, a specialist adviser.
The pension freedoms, a series of reforms introduced in April 2015, have created another incentive to use the plans, said Nigel Waterson, chairman of the Equity Release Council, the sector’s trade body.
As a result of the reforms, people aged 55 or more are able to take their entire pension pot as a cash lump. At the same time, the pensions “death tax” on unspent savings was removed.
Now, instead of pensions being subject to a 55pc tax at death, there is no tax to pay if the individual dies under 75. And only income tax, at the recipient’s marginal rate, is due if death occurs after 75.
This has opened up an entirely new field of inheritance tax planning where the well-off are effectively incentivised to leave their pensions intact and spend other money in retirement – including, potentially, money raised by borrowing against their home.
Financial advisers routinely now tell their clients to spend their other assets such as Isas, which do attract inheritance tax, first, before emptying their pension pots, Mr Waterson said.
“If you’re reasonably well off with a valuable house and decent-sized pension pot it makes huge sense to leave your pension intact to pass on tax-free to your children,” he said.
“Then you can use equity release to give them a ‘living inheritance’, to buy their first property for instance, and to save on inheritance tax.”
The sums removed from properties via equity release schemes have rocketed over the past 12 months. More than £700m was released from homes between April and June this year, the most ever in a single quarter. It is expected that 2017 will see more than £3bn in new borrowing, the highest figure on record.
Equity release plans come in a variety of forms but all involve taking cash – as a lump sum, as income or both – from a home. Typically the loan, which grows with interest that “rolls up”, is paid off only on death. Minimum ages vary between providers but is typically 55. It is mandatory to take regulated financial advice when using equity release.
In the past, taking a mortgage out on homes later in life was seen as a last resort where all other income options had been exhausted. The sector was mired in controversy in the Nineties when thousands found that high interest rates had swallowed all the equity in their properties.
Since then the City watchdog has taken oversight of providers, the vast majority of which now offer “no negative equity” guarantees that mean loans will never be more than the property value.
Interest rates are still far higher than on conventional mortgages but have fallen steadily following the Bank of England’s cut to the official interest rate in August last year. In 2012 the typical loan rate for a 70-year-old was around 6pc, according to Key Retirement, and is now just 4pc. At the latter rates, debts will double in 20 years – at 6pc it would take 10. These figures are based on compounding the interest.
Lenders have also added features that allow borrowers to protect their family’s inheritance by “ring-fencing” equity or paying the interest during their lifetime, which prevents the loan from escalating.
Paying for home renovation is still the most common use of funds released from lifetime mortgages, according to the Equity Release Council, but lenders say it is becoming more popular to use the cash released to help children on to the property ladder.
A spokesman for Aviva, one of Britain’s biggest lenders, said: “We are seeing larger sums of money being accessed in individual cases, which is likely to be a reflection of the increasing number of uses people have for released equity, such as helping both themselves and family and for efficient inheritance tax planning.”
Another popular use of equity release is to clear outstanding mortgage debt as people enter retirement. For many, downsizing may still be the best option.
The state pension will increase by at least £4.78 a week, the Lifetime Allowance will increase by £30,000 and public sector pensions will be upgraded by up to 4.6 per cent, following today’s September CPI inflation figures of 3 per cent.
The increase, up from 2.9 per cent in August, has sparked predictions of a 0.25 per cent increase in the Bank of England base rate in November, although the £825 increase in the cost of living of the average family has also raised concerns at the possibility of a consumer slowdown.
The ONS’s September CPI inflation figures will increase the Lifetime Allowance for the first time, rising to £1,030,000. Those above the current Lifetime Allowance of £1,000,000 without Lifetime Allowance protection, will see their Lifetime Allowance Excess tax charge fall by up to £16,500. The increase could also increase their tax-free cash by £7,500.
Full state pension will increase from the present level of £159.55 per week, equivalent to £8,296.60 per year to £164.33 a week, or £8,545.50 a year.
The September inflation figures are also used to calculate public sector pension increases. Since 2015 Public Sector Pensions have moved to using Career Average Earnings as opposed to final salary pensions. Some pensions increase this cumulative accrued benefit by more than inflation. Benefits in the Teachers’ Pension increase at CPI + 1.6 per cent, while the NHS Pension increases at CPI + 1.5 per cent, and the Police Pension at CPI + 1.25 per cent.
This means the increase for pensions being accrued will be 4.6 per cent on the Teachers’ Pension, 4.5 per cent for those in the NHS and 4.25 per cent for the Police Pension Scheme.
Retirement Advantage pensions technical director Andrew Tully says: “The latest inflation news really is a double-edged sword. On the one hand key state benefits including the state pension will increase by at least 3 per cent due to the triple lock. Public sector pensions in payment will also increase.
“People saving hard for retirement now have an opportunity to save a little more as the lifetime allowance, basically the overall limit on the value of your pensions before you get hit by an extra tax charge, will also increase by £30,000. This doesn’t sound like a big incentive but anything that helps people who are doing the right thing but are being hit by this arbitrary limit is welcome.
“The sting in the tail though for anyone trying to make ends meet is the seemingly never ending rise in the cost of living. With households needing to find an extra £825 a year to maintain their standing of living.”
I have worked in retail financial services for the last 30 years, from the coal face as an IFA to the back office as head of compliance or technical services.
Throughout this time, I have always believed the UK should follow the American Securities and Exchange Commission model of regulating products alongside the advice provided.
With regulation in the UK simply based upon the advice provided, we read last week that the FCA has spent many hours looking at adviser’s client files where defined benefit transfers are involved.
Over the last two years, it has reviewed “detailed information” from 22 firms on their DB transfers, with 13 (a tiny percentage of the circa 15,600 the FCA regulates) providing client files after its initial analysis.
Of the 88 cases included in the findings, just 47 per cent of the recommendations to transfer were deemed suitable. Suitability was unclear in 36 per cent of cases, while 17 per cent were ruled unsuitable.
As for the FCA’s view on the suitability of the recommended product, it found 35 per cent were suitable, 40 per cent was unclear and 24 per cent unsuitable.
The FCA staff that visit advice firms tend to be bright young things that have recently graduated and who work long hours. Most of them could not financial plan their way out of a paper bag. The FCA says there was not enough fact finding and calculating of the risk the client wanted to take. Did those assessing the transfer files consider the following?
There are 11 million people in the UK relying on 5,800 DB pension schemes to provide their income in retirement. According to the Pensions and Lifetime Savings Association, many employer covenants are under pressure and 3 million members in the weakest schemes only have a 50:50 chance of receiving their full benefits in the future.
Meanwhile, the DB schemes deficit level stands at £460bn, with little hope of reducing in the short term.
With high stock valuations, historically low bond yields, the uncertainty around Brexit and political instability, DB scheme members have an opportunity to consider, with the help of regulated advice, as to whether to take the sky high, forty-times cash equivalent transfer values.
The opportunity to transfer at such huge multiples may never be seen again in my lifetime once bond yields rise. Add to these economic factors the needs beyond the transfer value, such as the wish to leave money to dependents and minimising tax, all of which adds to the attractiveness.
Is advising on DB transfers the same as to kill the goose that laid the golden egg? I think not. If the money taken is advised upon for a lifetime, with adjusted risk profiling and cash flow calculations, this may be the best outcome for the majority of the millions of DB scheme members for the next 30 years. As long as the FCA clamps down on bad products.
The lifetime allowance is set to increase from April for the first time since 2010. Given the hatchet that has been taken to the LTA since then, this is a welcome change in direction.
The plan to increase the LTA in line with the consumer price index was announced in 2015 and confirmed by the Treasury in July this year (although at least one former pensions minister has expressed views it may yet be due for a trim once more come Budget time).
The reality is that more and more people are being caught by the LTA and, although any increase in its level is welcomed, the CPI linking will slow the growth of people being caught, rather than change the direction of travel.
So, if you know they are likely to breach the LTA, why would you encourage a client to continue to put money into a pension? Let’s look at the pros and cons.
Those who have LTA issues are likely to be at least higher rate taxpayers – maybe additional rate.
Assuming higher rate relief going into a pension, any personal contributions will benefit from 40 per cent relief. If a client has control of their company and pays an employer contribution instead of salary, they effectively get 40 per cent relief plus National Insurance savings on top.
Ad we all know that, once in the pension, they benefit from tax-free compound growth.
On the downside, once the LTA is breached, a client is going to pay a tax charge on the excess, plus income tax on any withdrawals they make.
If they take the excess as income, the LTA charge is 25 per cent and then income tax on the balance. For a higher rate taxpayer, this is an effective rate of tax of 55 per cent.
Of course, someone who may have been a higher rate taxpayer while paying in may only be a basic rate taxpayer at point of withdrawal, in which case the effective rate of tax is only 40 per cent.
If the client chooses to take the excess as a lump sum instead of income, then the charge is 55 per cent, so really only a viable option for higher or additional rate taxpayers.
If a client is likely to be a basic rate taxpayer in retirement, then 40 per cent tax relief going in and 40 per cent tax coming out with the benefit of tax-free growth in between is not a bad deal.
If the client is still a higher rate taxpayer then the 55 per cent tax rate on withdrawal looks high, but they need to weigh up the benefit of those tax-free compound returns versus taxes paid if invested elsewhere over the same period.
The real benefit may come if the client does not need the pension above the LTA but is instead looking at tax-efficient ways of passing funds to the next generation.
If the pension is untouched on death before 75 then the 25 per cent LTA charge will apply to the excess, and the balance can be paid tax-free to any nominated beneficiaries provided designated within two years.
Taking the more optimistic view that they live beyond age 75, then the 25 per cent LTA charge will be taken on their 75th birthday, with growth thereafter exempt from any further test. Income tax will be payable when their beneficiaries eventually withdraw the funds but this will be at the beneficiaries’ marginal rate, not the client’s.
By this stage of life, the client may well have grandchildren, as well as children, and potentially great-grandchildren. They can have any number of beneficiaries and passing funds on to non-taxpayers is especially efficient. Beneficiaries under the age of 18 would effectively have their funds managed by parents and could be used for school fees or the like.
Another option if the client does not need the excess funds personally is to take income and use it to fund pension contributions for their children. By the time the client reaches later life, their children could well be higher rate taxpayers, so withdrawals at an effective rate of tax of 40 per cent could be used to fund their pension contributions in a tax neutral way. Doing this moves funds from a scheme with an LTA excess to the next generation who may not have the luxury of the same issue.
Clients of financial advisers can hope to be almost two-fifths a year better off in retirement than those who opt to take financial decisions by themselves, according to research by Dunstan Thomas.
A survey by the firm found adviser clients could on average hope for a total post-retirement, pre-tax household income of £33,557.45, compared with £20,373.40 for those who have made all their retirement income provisioning decisions alone.
Dunstan Thomas director of retirement strategy Adrian Boulding said: "While it is inevitable those who go to an adviser for assistance have more savings to manage in the first place, it is worth noting financial advisers instil the financial disciplines of saving, planning and reviewing progress, which helps build long-term savings."
Even so, the survey also revealed a marked lack of appetite for financial advice among baby-boomers, with almost half (47%) of that generation doing nothing or planning to do nothing at all to gain more knowledge about pensions pre-retirement.
ONS figures show UK 'drowning in a sea of small pots' - Adrian Boulding
The research, which surveyed 1,002 member of the UK's 'baby-boomer' generation aged 54 to 71 years old, found just a fifth (20%) had sought or planned to seek face-to-face regulated financial advice.
A similar proportion (17%) had sought or would seek financial guidance from the likes of the Money Advice Service, The Pensions Advisory Service or Pension Wise. A quarter of this demographic instead relied on reading the financial pages of national newspapers for guidance.
More specifically, Dunstan Thomas found more than half (54%) of those surveyed had no intention of visiting an adviser for inheritance tax-related financial advice - and indeed just 12% planned to use an adviser for this purpose.
Other reasons baby-boomers cited for using an adviser included obtaining the security of a professional opinion (16%) and because they did not want to make weighty financial decisions alone (8%).
Answers to a separate question suggested more than a third (36%) of baby-boomers could not differentiate between regulated advice and guidance - while just 17% claimed fully to understand the difference.
More and more of my conversations with advisers are focused on those clients that have exceeded the lifetime allowance and have either not been eligible for any of the protections available at the time or have invalidated the options before they realised.
There is little the adviser can do; a problem compounded thanks to not knowing what the future holds from one week to the next, let alone in the years to come.
In many cases, these problems arise because clients have deferred defined benefit schemes but no idea of their value and what the implications are for the rest of the money they have been saving.
So what should they do about their lifetime allowance issues? There is no right answer here but there are a number of considerations that must be worked through.
Firstly, do they want and need the guaranteed income from the DB scheme? This is usually a no-brainer: yes, they do. If they are over the lifetime allowance with all their benefits put together, then it is imperative they access their DB scheme first to avoid paying the charge from there.
If they do not need to take the money purchase benefits, there is then the issue of when or if they should crystallise the funds.
If you look at it in a purely technical way, it makes perfect sense to crystallise the money purchase benefits in their entirety as soon as possible to protect any growth from the lifetime allowance charge.
You need to consider any inheritance tax issues that may occur because of the pension commencement lump sum but this can be mitigated with other investments over the longer term.
If you do decide to crystallise the money purchase scheme and the funds are in drawdown, it needs to be managed so as to ensure any growth taken from the fund is done so in as tax-efficient manner as possible before the client reaches age 75.
This is because any growth will, again, be set against the lifetime allowance and would cause an additional lifetime allowance charge.
This might all sound like perfect sense. However, should the client be considering this at age 65 – even 55 – you have as much as 20 years’ worth of legislation to anticipate.
Is any of this the right thing to do in a world where we do not know whether there will even be a lifetime allowance in a few years’, let alone two decades’, time?
None of us have a crystal ball and the only thing you can really do is explain (and document the fact you have) to clients that this is a risk.
You can protect them from the current legislation but not future unknown changes often suggested by thinktanks and others who believe they have the ear of the Government.
One can only dream of a level of stability in the pension world that would mean clients being sure they are advised correctly.
Claire Trott is head of pensions strategy at Technical Connection