Lifetime Allowance scheduled changes

The Lifetime Allowance (LTA), currently £1million, is scheduled to increase in line with inflation from April 2018. It is important that advisers and paraplanners are aware of this increase in the LTA as timing of benefits could prove crucial in managing clients’ tax affairs. This could be of particular importance for clients phasing vestings as part of an income strategy in the decumulation stage.
 
The increase will be calculated in line with the change in Consumer Price Index (CPI) over the 12 month period between September 2016 and September 2017. This figure will be released on 22 October 2017 with the LTA rounded up to the next £100.
 
If inflation remains at August’s rate of 2.7% the LTA will increase to £1,027,000. Although not a large increase, it could result in tax savings for some clients who are, or might be, close to the current LTA.
 
At a vesting the value of benefits taken 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 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:
 
Client’s fund £900,000
Drawing benefits 31 March 2018 - 90% of their LTA used (unless they have some form of protection)
 
If they draw benefits on 6 April 2018 - only 87.63% used of their LTA.
 
Advisers and paraplanners should be aware of these increases in the LTA as timing of benefits could prove crucial in managing clients’ tax charges.