Autumn Budget 2018: LTA to rise with inflation

As of next April, the Lifetime Allowance (LTA) will rise in line with inflation to £1,055,000, it was announced today (29/10/2018) in the Autumn Budget.

The LTA, essentially a stealth tax on investment success, has been progressively whittled away to boost the Treasury coffers since it was introduced in 2006 by the then chancellor Gordon Brown. But last year, when the LTA stood at £1 million, it was announced it would from now on be increased each year in line with inflation. Therefore, today’s announcement does not come as a surprise.

Autumn Budget 2018: What it means for you

The Individual Savings Account (Isa) limits will remain unchanged at £20,000. The allowance has never been more generous with plenty of options, as savers and investors can now select one of seven different Isa types.

The Junior Isa limit will rise in line with CPI inflation to £4,368. This same limit will apply to Child Trust Funds (CTFs). In addition, it was announced the government will publish a consultation next year on draft regulations for maturing CTF accounts.

It is no surprise to anyone that the ISA has gone without a change in this year’s budget. Two years ago the allowance stood at £15,240, before being raised to £20,000 in April 2017. The increase surpasses rises in inflation since the Isa was introduced in 1999, when the allowance stood at £7,000.

Making big changes with small adjustments

Although it was a quiet day on the pensions front the rise in the higher rate tax threshold, from £46,350 to £50,000 next April, will result previously higher-rate taxpayers slipping into the basic rate tax bracket.

As a consequence, the tax relief they receive when putting money into a pension will be halved from 40% to 20%.

Mind the LTA Gap

It’s easier than you think to run up against the pensions lifetime allowance, says David Prosser.

Although the government insists that the lifetime allowance (LTA) on pension funds is a tax that hits only a handful of very wealthy savers, it affects more people than you might think. HM Revenue & Customs is raising steadily more cash from the system: in the 2016-17 tax year, pension savers hit by the LTA handed over £110m – three times more than in 2015-16.

The LTA caps the amount you may build up, in total, across all the private pension schemes you have, whether with an employer or individually. Currently, the limit is £1,030,000 – any savings above that level are subject to a 55% tax when you start cashing in your pensions.

Special rules apply to savings in defined-benefit pension schemes that guarantee a pension payout related to salary. For the purposes of the cap, multiply the pension you have been promised by 20 – so if you’ve built up an entitlement to a £25,000 annual pension, say, your savings would be worth £500,000.

So why are more people falling foul of the allowance? One reason is that it has been repeatedly reduced in previous years from a high of £1.8m in 2012. Last year, the government promised to increase the allowance in line with inflation, but this will see only modest rises for the foreseeable future. Investment returns in recent years have been healthy, buoying the value of many savers’ pension funds, and tax relief on pension contributions, even for high earners, is still generous.

The power of compound interest means many people who wouldn’t expect to run into problems with the LTA may be in for a nasty surprise. A 35-year-old saver with £300,000 of pension savings or a 45-year-old with £400,000 could easily come up against the cap as they approach retirement, assuming they continue contributing at current levels and investment returns are reasonable.

How to avoid the trap

The best way to avoid this tax trap is to take action early. Monitor your exposure to the cap over time. If you’re getting close to the limit , consider reducing or even stopping contributions. Early retirement could be another option. Other tax-efficient savings schemes, including individual savings accounts, offer a different way to put money by while still benefiting from tax breaks. But even if you have to switch savings into taxable investment plans, you’ll still be better off than paying a 55% penalty charge on excess pension cash.


Are middle class savers getting stung by a 55% pension trap meant for millionaires?

Lifetime Allowance Discussion - Capital Wealth PartnersThe article below from This is Money provides a very startling view of how some savers could get caught out by a tax penalty they never thought would be aimed at them.

  • The maximum you can build up in a pension without a tax penalty is £1.03m
  • But many workers whose salaries have risen unwittingly breach this allowance
  • The result is a £70m jump in pension tax collected by HM Revenue & Customs 

A £1 million pension pot might sound like a luxury reserved for the super-rich. After all, the absolute maximum the Government allows you to build up in a pension is £1.03 million.

Anything above this is taxed at 55 per cent when you take it out.

But research for Money Mail has found many workers whose salaries have risen to about £80,000 are unwittingly breaching this so-called lifetime allowance.

The result is a £70 million jump in pension tax collected by HM Revenue & Customs over the past two years — and the numbers of people caught out is doubling.

Experts estimate as many as 500,000 savers could be at risk of falling foul of the lifetime allowance trap.

Those affected include head teachers, middle managers, accountants and public sector workers with final-salary pensions.

With this scheme, your retirement income is based on your final salary and your years of membership — not a pot of cash you’ve set aside.

To work out how much these guaranteed retirement incomes are worth against the £1.03 million lifetime allowance, the taxman multiplies your starting retirement income by 20.

So if you were on track to earn £10,000 a year when you retired, your pot would be deemed to be worth £200,000.

Calculations by investment firm AJ Bell show it’s easier to breach the £1.03 million allowance than it might seem. Most final salary schemes have an accrual rate of 1/60. This means that for each year of service, you build up a pension worth 1/60 of your final salary.

Say a teacher started out at age 25 and worked for 40 years, retiring at 65 as a headteacher on a £90,000 salary. They would have built up a pension worth 40/60 of that final £90,000 salary — or £60,000 a year.

HMRC would multiply that figure by 20 to see how it compares to the lifetime allowance. This works out at £1.2 million. The headteacher would face a tax charge on the sum above £1.03million — £170,000.

This is subject to a 55 per cent charge if taken as a lump sum. If it’s left in the pension and taken as annual income, the rate is 25 per cent on top of any normal income tax charges.

In the case of the headteacher, the extra tax charge would be £93,500 if taken as a lump sum or £42,500 if taken as regular income. If you choose the income option, you must still pay the tax charge up front.

Those earning under £80,000 can breach the limit if they have private pension savings as well as final-salary arrangements.

For example, a middle manager earning £70,000 with 40 years of service would be on track for a final-salary pension worth about £933,333 in total.

If that worker also saved £250 a month into a private pension, they would have £104,158 after 20 years, assuming 5 per cent investment growth after charges.

This would tip them over the lifetime allowance by £7,491 attracting a £4,120 tax charge if taken as a lump sum.

Those who change career could also be affected. Imagine someone who changes job aged 50, having reached a £70,000 salary after 30 years.

They might be on track for an annual final-salary pension of £35,000 — worth £700,000 in the taxman’s eyes.

If that person earned £70,000 for another 20 years — their remaining working life — and started paying 17 per cent of their salary into the pension scheme at their new employer, they would only need an annual 5 per cent return to bust the lifetime allowance at age 64.

Their fund value would then be £1,039,862 — just over the £1.03 million limit.

If they dipped into the fund at that point, there would be a £5,424 tax charge if taken as a lump sum.

And future growth above this level is sure to create a rising liability for tax. The lifetime allowance was introduced in 2006 at £1.5 million to stop high earners using pensions to dodge income tax.

The threshold has fallen steadily over recent years, meaning more and more people are getting caught out.

How has lifetime allowance threshold changed over the years?

Lifetime Allowance change over the years

Tax charges for breaching the lifetime allowance more than tripled from £40 million in 2014-15 to £110 million in 2016-17. The numbers ensnared more than doubled, from 1,020 to 2,410.

Tom Selby, senior analyst at AJ Bell, says: ‘The reality is many workers with final-salary schemes have no idea their pension is worth anywhere near £1 million, so there is a risk they will be caught out and face a whopping tax charge.’

There are ways of protecting yourself. In 2016, HMRC introduced schemes to protect some investors’ allowances, known as Individual Protection 2016 and Fixed Protection 2016. There is no application deadline.

Individual Protection 2016 allows someone with a pension worth more than £1 million at April 5, 2016, to shield their pot from tax charges, subject to a maximum £1.25 million. You can continue saving into a pension if you have allowance left.

With Fixed Protection 2016, your lifetime allowance is frozen at £1.25 million. Anyone can apply, but you cannot make any more contributions.

You can use Fixed Individual Protection 2016 and Individual Protection 2016 at the same time. About 61,000 people registered individual protection on pension funds in 2016-17, up from 6,000 the year before, and 21,000 in 2014-15.

Patrick Connolly, a certified financial planner at Chase de Vere, says: ‘While paying a tax charge is far from ideal, what matters is the amount of pension you actually receive.

It may be better to benefit from employer contributions and achieve, say, a £1.5 million pension pot and pay the extra tax.

‘It depends on your situation, so independent financial advice is important.’

Original Source

How do people get stung with Lifetime Allowance charges?

The tax paid by individuals who have breached the lifetime allowance (LTA) has soared by 1,000% since it was introduced in 2006.

Figures obtained by Retirement Advantage earlier this year highlighted that £110 million in tax was obtained from savers who exceeded the LTA during 2016/17, compared with less than £10 million in 2006/7 when the allowance was introduced.

Financial education business Wealth at Work has said the rise in those breaching the LTA can be attributed to three key reasons.

They are Blissfully unaware of their position

The first reason people exceed the LTA is they simply do not think they are likely to have a pension pot valued at £1.03 million, the current LTA limit, or more.

Wealth at Work explained this could affect those who do not check the value of their pension or have not done so for some time.

Also, many defined benefit (DB) scheme members are unaware that their pension is valued at 20 times their annual pension for LTA purposes. DB members looking to transfer into a defined contribution (DC) arrangement can also be unaware their transfer value can also result in a breach of the LTA.

People think they are much further away than they think

Other people may believe they are far from breaching the LTA when they have actually reached or exceeded it. This can be the case where employees are making higher than minimum contributions, have received a pay rise or are receiving matching contributions into their scheme.

It can also be the case when their investments perform better than expected. This was one argument made by MPs in a recent report calling for the LTA to be scrapped.

People think they have protection when they do not

Wealth at Work also said some employees may think they have taken protection measures and opted out of their workplace pension to safeguard their savings from an LTA charge.

However, under auto-enrolment rules, employers are required to re-enrol employees every three years. This could invalidate protection measures, even if only one payment is made.

What to do?

One of the best ways to avoid being stung by these charges is to take advice from a financial advisor who specialises in these cases. Should you wish to manage your own LTA pension accounts you may want to consider some coaching in the form of Capital Wealth Partners Lifetime Allowance Coach as found here.

Lifetime ISA vs SIPP: What is best for retirement?

SIPP v LTAPlanning for retirement can seem like a daunting prospect. There’s so many products and services to help you save for the future on the market, it’s difficult to distinguish between them and determine which one is the most suitable for your situation.

The latest product to hit the market is the Lifetime ISA (LISA), which has many benefits of the self-invested personal pension plan (SIPP), but with more flexibility.

Both of these accounts allow investors and savers to manage their own funds for retirement with some key differences. Below we will consider the pros and cons of both and try to establish which is the best for retirement saving.


The LISA is undoubtedly the more flexible product. Savers can put away £4,000 a year into this product up to the age of 50. The government will then add a 25% bonus to any contribution giving a maximum possible yearly savings total of £5,000. So, if you max out your savings allowance every year between 18 and 50, you could receive a maximum bonus of £33,000.

A SIPP has bigger contribution limits but has stricter tax and withdrawal rules. You can put away £40,000 a year into a SIPP without any adverse tax benefits. If you earn over £150,000 a year, the allowance is reduced by £1 for every £2 of income above £150,000. You also receive tax relief on pension contributions (if you’re a taxpayer) of 20% and higher, or additional-rate, taxpayers can claim back a further 20% or 25%. For 2018, the lifetime allowance limit for saving in a SIPP is £1.03m.

Both of these products offer a useful bonus on your savings and can be used for retirement, but here the similarities end.

When it comes to flexibility, the LISA wins. As well as saving for retirement, you can also use the product to fund the purchase of a home, as long as you’re a first-time buyer. Unfortunately, if you already own home, you cannot claim this benefit. Any withdrawals that don’t qualify will be taxed at 25%, a levy that’s designed to take back the government contribution, and more.

According to figures, this fee would grab back the government bonus as well as well as 6.25% of your personal contributions. If you use the money for retirement or first home purchase, there’s no fee or additional tax to pay.

SIPP’s can’t be drawn down until 55 and, even then, withdrawals attract tax. The first 25% will be a tax-free lump sum and you’ll get charged tax on the rest as if it were income.

It all comes down to you

Overall, which product you choose to use ultimately depends on your financial situation. SIPP’s allow you to save more every year, although you cannot access the funds until retirement.

LISA’s can be accessed at any time if you have a funding emergency. Although these withdrawals will cost you money, you won’t have to pay any extra income tax on top.


Original Article

Planning strategies to beat the lifetime allowance

The lifetime allowance in 2016/17 was more than 1000 per cent greater than it was in 2006/07.

The lifetime allowance affecting more people is not really a surprise. But the scale of the increase, along with the knowledge that many more clients will be affected over the next decade, highlights the need for careful planning.

For those clients who have not reached retirement age, it is worth considering whether ongoing pension payments are worthwhile if they may breach the lifetime allowance in future.

A key aspect is if the employer offers an alternative benefit in lieu of pension contributions. If not, continuing to pay into the pension is a simple decision.

If the employer does offer an alternative, then the position is more complex and involves analysing many aspects like the tax paid by the client and other potential investment options, such as Isas, bonds, venture capital trusts or pensions for other family members.

For those reaching retirement age, applying for some form of protection is an obvious route. Far more people applied for protection during the 2016/17 tax year, following the reduction in the lifetime allowance to £1m, than did in 2012 or 2014 when previous reductions took place.

But for those who have not yet applied, Individual Protection 2016 is likely to be the only option. This is still available to those who had pension savings worth £1m or more as at 5 April 2016, although there are limitations for those who already have some other form of protection.

Many others who will start to take benefits shortly, including some transferring from final salary schemes, may encounter the lifetime allowance over the next few years. That’s not necessarily when they first take benefits, but at age 75 when the second lifetime allowance check kicks in for those who use drawdown.

That second test measures the growth in value since the client entered drawdown and will particularly affect those with higher pots who take little, or no, income and achieve good investment growth.

It is crucial to be aware of the second check when considering how much income the client takes before age 75 and the appropriate investment strategy. But many other factors come into play, such as the income tax paid on any withdrawals and the client’s longer-term needs and objectives.

For those clients who never intend to withdraw funds but cascade them onto family, accepting a 25 per cent lifetime allowance tax charge on excess funds at age 75 may be the best strategy.

Many people dislike the arbitrary nature of the lifetime allowance and the fact it penalises those clients who obtain good returns on their investments. There is also a significant disparity in the way benefits are measured depending on whether people have defined benefit or defined contribution pensions. However, as long as we are stuck with it as part of the current pension tax framework, it remains a key area where people need the expertise advisers can bring.

Original Article

Active vs passive: Do you really want it all?  

ETFsETFs, better known as market trackers, do what they say on the tin. They buy all of an index to allow you to track the performance of that market.

Take the FTSE for example. Buying a FSTE 100 tracker would give you ownership of every company in the FSTE 100. The amount of each company you own is weighted to the market cap of that company in that index. You can buy a tracker for any index around the world, allowing you to invest in any market.

The theory is that this provides the ultimate diversification method to spread your investment. However, do you really want to own every company within the index? Many of them may be there due to size and not because they represent good value.

Challenging stock holdings in trackers

For an example, let’s look at Centrica. The utilities company is a FTSE 100 listed company. However, it faces considerable challenges in the future with the UK government considering energy bill caps. This could have a serious impact on the way they do business and ultimately damage the share price. Is this really the best time to be investing in this type of company?

The same theory applies to other trackers around the world, and more specifically emerging market trackers.

Trackers and emerging markets

Emerging markets are a great addition to any portfolio, and offer the opportunity to make great returns. However, they can be volatile and fund managers view them as an inefficient market.

They are labelled “inefficient” due to the lack of reporting that they are required to complete. This can lead to information being held back that may have an adverse effect on the share price. Knowing the market and understanding the political system is the only way to navigate these markets successfully. And that is why a much higher percentage of fund managers outperform the index in emerging markets, than in efficient markets such as the S&P.

This begs the question, are trackers right for every market?

Trackers in efficient bull markets

The S&P for example makes up 60% of a global market tracker. And 16% of that is in top tech and healthcare companies such as Apple, Microsoft, Pfizer and Amazon. All of these companies are well reported, and the indexes they form part of are some of the most highly regulated in the world. This fair playing field has made it very hard for active managers to beat the market over the last seven years. This adds weight to the opinion that trackers do work in the right index.

A benefit of active fund management

Typically, when markets are rising, trackers do very well. However, if a market starts to level off or even pull back, the autopilot doesn’t kick in and you can give gains back as quickly as you have made them. Protection against this is an essential feature of active management.

A popular type of active manager is a Discretionary Fund Manager (DFM). These managers are a bridge between both active and passive and hold both of these types of investments in your portfolio. They create the right balance between the two options and can move funds between the two, subject to market conditions. This keeps the overall costs down and gives investors the best of both worlds.

In a rising market, they may hold more trackers, however, if the market starts to fall they are there to catch it and move funds back to safe havens. This is why active management (DFM) typically outperforms passive in periods of level or falling markets.

Could trackers contribute to a future market crash?

If the market started to pull back, an ETF investor would need to sell their entire holdings in that index to come out of the market. This no doubt would further fuel the fall which may encourage other ETF holders to exit as well. The result of which could create a perfect set of conditions for a future market crash.

If some of these listed companies are being held up by the volume of money from ETFs, where would the share price end up if that ETF money was removed?

Of course, this is simply speculation and markets may continue the bull run they have been on. But are you willing to risk it?

Consistent periods of market highs are not normality and investors should not get complacent and think this is the new norm. With interest rates slowly recovering, the flow of funds could start to move back into long-term interest and reduce demand for equities.

This brings me to the conclusion that there is no correct answer when looking at active vs passive. In fact, the way we have been looking at this question seems to be all wrong.

The best way to get the right balance is a carefully weighted mix of both Active and Passive.

Are Defined Benefit Pension Funds Disappearing?

CarrilionAlthough this could be a sore subject for many of those reading, the article below and ones like it are important to pay attention to with shifts in the pensions environment.

Below you will find an article released on 14/01/18 by Geoff Ho on In the 24 hours since this article was released, Carillion has now gone into liquidation putting thousands of jobs at risk and needing £300M of short-term funding. As Carillion is carrying a pensions deficit of roughly £580M this could be very worrying for retired Carillion workers, although, their pensions will be protected by the Pensions Protection Fund (PPF) acting as a pensions “lifeboat” to ensure all pensions are paid out in accordance with its normal rules.

Defined benefit pension funds are at risk of disappearing says Geoff Ho

Pension Protection FundEmployer-sponsored defined benefit pension funds have been struggling under enormous financial pressures for years and the day is coming when there will be none left in the private sector.

The Government’s Pension Protection Fund (PPF) is on standby in case it needs to rescue the 13 UK defined benefit (DB) pension schemes operated by Carillion, the outsourcing and construction group that is fighting for its survival.

Even if Carillion escapes the fate of the Toys R Us, Palmer & Harvey and Monarch Airlines schemes, others will follow soon enough.

Over the last 20 years a toxic combination of low interest rates, stock market crashes, accounting rule changes, Government tax raids (see Mr G Brown) and people living longer have fatally undermined the DB pensions system’s finances.

Even though stock markets have been on an extended bull run, low interest rates have sent pension fund liabilities rocketing.

Rates have started to rise, but it is too late as firms are no longer willing to shoulder the burden of running a DB scheme.

No company formed in recent years offers one.

The private sector DB schemes that have surpluses will eventually end up being sold to insurers, while the underfunded ones will wind up with the PPF.

It will not happen tomorrow, but the sun is setting on the golden era of workers’ pensions and only schemes that expose members completely to the stock market, called defined contribution funds, will remain.

Article source.

*Please note that this article does not necessarily reflect Capital Wealth Partners (CWP) view on the current DB Pensions situation and CWP does not encourage anyone to move away from a DB Pension where it may not be suitable.

What is the pension lifetime allowance and what changes were made in Budget 2017?

Lifetime AllowanceThe Budget 2017 did not cut the pension lifetime allowance as feared. But what is the pension lifetime allowance?

The pension lifetime allowance (LTA) is the overall amount of pension savings that you can have at retirement without incurring tax charges.

The Pensions Advisory Service says: “The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.”

The lifetime allowance has stood at £1million since April 2016 when it was reduced from £1.25million. It is now scheduled to rise by £30,000 in April 2018.

The Budget said: “The lifetime allowance for pension savings will increase in line with CPI, rising to £1,030,000 for 2018-19.”

An increase in Consumer price index (CPI) is linked to the base rate or the LTA. So an increase in the CPI will lead to a hike in the LTA limit.

Ahead of the Budget, Investec warned that the Chancellor could reduce the lifetime pension allowance “so more pension benefits incur an extra tax charge”.

But this did not happen and there was very little on pensions in the Budget speech given in the House of Commons earlier today.

Mark Henderson, senior partner at online investment site True Potential Investor, said: “It’s hard to remember a Budget for over decade where pensions got fewer mentions…

“That is a relief to pension savers who have lost count of the number of changes to pensions over recent years.

“Slashing annual allowances must have been tempting against lower growth figures and pressure to spend on infrastructure, but we are pleased that the Budget offers a period of calm and stability for pensions.”

Mr Hammond did not reduce the pension annual allowance, which currently stands at £40,000. If your ‘adjusted income’ is more than £150,000, your annual allowance is tapered down.

The Pensions Advisory Service says: “While most people aren’t affected by the lifetime allowance, you should take action if the value of your pension benefits is approaching, or above, the lifetime allowance.

“As pensions are normally a long term commitment, what might  appear modest today could exceed the lifetime allowance by the time you want to take your benefits.

“It may be necessary to take your pension early or stop contributing to the scheme/plan, even though you have not retired, to avoid your benefits exceeding the lifetime allowance.


Watchdog says you CAN move your final salary pension even if advisers say no

Retirement:Pension BindersSavers told by financial advisers that they cannot transfer their “final salary” pensions – even if they are fully aware of the risks – have been granted unexpected support by the City watchdog and Treasury.

Under Government rules you must seek financial advice if transferring a final salary pension, also known as “defined benefit” pension, where the entitlements are valued at £30,000 or more.

Transfers have grown in popularity because moving money into “defined contribution” schemes (the more common pension arrangement) allows greater choice over how to make withdrawals from pension pots. The ability to dodge inheritance tax is another benefit of the latter schemes, as reported here last week.

But savers have found advisers unwilling to help them transfer if they deem it not to be in their best interests.

Now the Financial Conduct Authority – which oversees financial advisers – has issued new guidance for advisers confirming that they should help what the industry has dubbed “insistent clients”. These are people who want to pursue something irrespective of advice not to do so.

The move follows another supportive paper, published in June, laying out similar guidance to advisers suggesting they should make it easier for savers seeking to move their money.

Many people are advised against the move because their final salary plans pay generous, guaranteed incomes rising with inflation. This is difficult to value, as the ultimate benefit will depend on how long the retiree lives.

As a result advisers are extremely cautious about recommending a transfer.

But the FCA’s guidance should help savers struggling to complete a transfer.

The watchdog reiterated that “where a client has received a personal recommendation they may choose to take a different action to the one that was recommended”.

It set out guidance for advisers to follow when helping people who want to act against their wishes, including requiring savers to state in their own words that they understand the implications of going against advice.

Richard Freeman, of Old Mutual Wealth, a provider of pensions and financial advice, said the guidance helped ease the “catch-22 situation”.

He said: “Common sense seems to have prevailed. As long as the original advice meets normal regulatory requirements, and the drawbacks of pursuing an alternative path are made clear, advisers can still support insistent clients.”

According to recent estimates around 210,000 people have moved money from final salary schemes over the last two years. At least £50bn of pension money is thought to left schemes as a result, but that still leaves well over £1 trillion of assets held by British final salary funds.

Original Source

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