This growth will then be measured against the LTA.
If an individual had initially used drawdown then decided to use some of those funds to purchase a lifetime annuity at a later date, the value measured against BCE4 is the amount used to buy the annuity less any amounts previously crystallised under BCE1.
Planning around the LTA
It is worth considering if ongoing pension payments are worthwhile if a client may breach the LTA in future.
A key aspect is if the employer offers an alternative benefit in lieu of pension contributions.
If not, continuing to build up pension benefits is a fairly simple decision.
If the employer does offer an alternative, then the position is more complex and involves analysing many aspects such as the tax paid by the client and other potential investment options such as ISAs, bonds, VCTs, or pensions for other family members.
Applying for some form of protection is an obvious option for those with substantial savings.
However 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 may encounter the LTA over the next few years.
In particular those who transfer from final salary schemes need to be aware of the disparity between the way benefits are measured against the LTA between defined benefit and defined contribution contracts.
In DB, the amount measured against the LTA is 20 times the pension (plus any separate lump sum).
That currently allows a pension of up to £52,750 to be paid without breaching the LTA.
However, in DC it is the value of the pot that is taken into account.
A transfer value in lieu of an income of £52,750 with attaching spouse’s benefits, escalation etc could easily be £2m or more – which potentially could mean a significant LTA charge - illustrating the inequality between DB and DC.
Clients in drawdown need to be aware of the second lifetime allowance check at age 75.
This 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 on to family, accepting a 25 per cent LTA tax charge on excess funds at age 75 may be the best strategy.
