Although relatively small, the increase to the LTA for 2018/19 is to £1.03m, every little helps with regard to tax planning.
At each vesting, the value of benefits vested is tested against the LTA and is expressed as a percentage of the allowance in force at the date of vesting. Individuals who decide to delay drawing benefits until after April 2018 will therefore use a smaller percentage of their allowance, giving themselves additional scope and possibly reducing any lifetime allowance charge they have to pay.

For example:

A client’s pension fund is £900,000 and they decide to draw benefits on 31 March 2018 taking only their pension commencement lump. Unless they have some form of protection in place, e.g. Fixed or Individual, they will use up 90% of their (and the current level of) LTA.

If they intend to continue to fund their plan by way of contributions (and as they have not already drawn income they are not subject to the Money Purchase Annual Allowance (MPAA)) they could fund a further 10% of the LTA in place when they next choose to vest.

If instead they decide to vest benefits in their pension fund on 6 April 2018, they will only use 87.38% of their LTA, allowing them scope to fund a further 12.62% of the now higher LTA figure.

Similarly, a client who has already drawn part of their pension fund, and is perhaps phasing their benefit vestings as part of an income strategy in decumulation could also benefit from holding back their next instalment.

Taking a tranche of £15,000 in March 2018 would use up 1.5% of their remaining LTA whereas a deferral to 6th April 2018 could mean using only 1.46%.

Advisers and paraplanners need to be aware of these increases in the LTA, as although relatively small in the overall picture, the timing of drawing benefits could prove important when managing and minimising clients’ tax charges.

Scheme specific protected tax-free cash lump sum*.
Conversely, the revaluation of scheme specific tax-free cash lump sum is adversely affected by the small increase in LTA.

Currently when assessing the fund growth, the fund value at 6 April 2006 is adjusted by a factor of 1/1.5.  From April 2018, this will be 1.03/1.5, which has the effect of reducing that element of the protected lump sum revaluation. Although this might not be material at this first inflation linked LTA increase, the impact of cumulative future increases should be considered.

*Where a scheme member does not hold either Primary or Enhanced protection but who had the right to more than 25% of their benefits value at 5 April 2006 as a tax-free lump sum, they may still have the higher percentage paid when they take their benefits which is called scheme specific lump sum protection.