The Complexities of Freedom
One of the key takeaways of this year's Budget is that good financial advice is going to be crucial for pension planning, particularly for those clients likely to be caught by the reduction in the lifetime allowance from £1.25m to £1m as from April 2016.
While £1m may sound a large sum, it would still only provide an annual income of around £27,000. For those who have put the maximum amount into pensions pots in order to secure a higher level of income once they retire, they will already be perilously close to the limit and likely to suffer a tax charge. For clients in their 30s and 40s there is also a danger of overfunding before they reach pension retirement age.
Clients that are close to the limit or who are likely to breach it before they reach retirement age, should be contacted to discuss options available. For those over aged 55 options may include taking money out of their pension pot and allocating it to other investments. While this will not reduce the lifetime allowance that applies, it gives the opportunity to grow investments outside of the lifetime allowance net. For others it may be wise to protect what they have now before the April 2016 deadline, in which case they can still take advantage of the £1.25m lifetime allowance. For others it may be better to pay any liability to tax rather than disrupt valuable benefits.
The chancellor sugared the pill with news that as from 2018, the lifetime allowance limit would rise in line with inflation. A further concession was the extension of pension freedoms to clients who have already taken out an annuity.
For those clients who have already bought an annuity prior to the announcement of pension freedoms, the news that they can cash them in for a lump sum is welcomed. But the practicalities of working out the value of an annuity in exchange for a cash lump sum have yet to be ironed out. Or indeed whether it would be worth it. For those clients with impaired annuity rates, for example, it is highly unlikely cashing in would be the best course of action.
Of course, any move to make pensions less restrictive is to be welcomed. The flip side is that freedom is a complicated business in terms of financial planning and the sooner IFAs get clients to assess their options the better.