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The Lifetime Allowance reduction – who will feel the effect?

Written By:
Guest Author
Posted:
26/02/2016
Updated:
26/02/2016

Guest Author:
Paloma Kubiak

The pension Lifetime Allowance will be cut from £1.25m to £1m on 6 April – the third cut since 2012 and a 45% reduction in less than five years. But who will be hit the hardest?

Many commentators have said the previous reductions to the Lifetime Allowance (LTA) only impacted quite wealthy individuals.

But the latest reduction will impact hard working individuals who’ve been prudent in their saving towards retirement, according to Gary Smith, financial planner at Tilney Bestinvest.

Not only does it impact those who’ve built up pension funds that are close to the £1m limit, but those with modest pension pots today could be effected owing to future investment growth.

As an example, a 40-year-old pension saver with a fund value of £465,000 who doesn’t intend to contribute any more would exceed the £1m limit by their 65th birthday (based on a 5% annual growth rate).

For a 40-year-old with £289,000 in their pension pot who’s able to save £1,000 per month, they’d reach the £1m threshold by their 65th birthday.

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And the same is true of a 40-year-old contributing £500 per month to a current fund value of £377,000.

The reduction in the LTA is likely to impact on significantly more individuals than the 55,000 the Chancellor estimated, said Smith, so many pension savers will potentially face a “very nasty surprise” when they reach retirement as they’ll incur a tax charge above the limit.

Smith added: “It also now seems inevitable that further attacks on pension tax reliefs and funding will be announced in the Chancellor’s forthcoming Budget statement on 16th March 2016 and, these changes could reduce the capacity for hard working savers to build up worthwhile pension values to support their anticipated retirement lifestyles.

“Indeed, the “squeeze” on pensions tax relief could be seen as a desperate act of a Chancellor in his attempt to secure a Budget surplus by the end of the current Parliament, whilst restricting his options to do so by promising not to increase Income Tax or National Insurance and ring-fencing some major departments from any spending cuts.”