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Adviser Workshop: How to consider the lifetime allowance for DB transfers

Adviser Workshop: How to consider the lifetime allowance for DB transfers

Neil Gregory (pictured above) and Eugen Neagu discuss how they approach the thorny issue of the LTA when advising on DB transfers.

Neil Gregory

Senior paraplanner, SG Wealth Management

We thoroughly educate clients on the lifetime allowance (LTA): how it works, how it is calculated and what it means.

Walk clients through

We do not treat the LTA as a tax penalty or a punishment. We emphasise the need to understand how transferring increases the chances of breaching the LTA in most cases. We always explain how the LTA can be protected and go into greater depth if that is relevant.

What if you leave everything as it is, carry on contributing to your pension but retire at 55? What if you leave everything as it is and retire at 60? It all depends on the client’s circumstances and when they want to retire. Providing these walkthrough calculations helps clarify that.

Plan ahead

We look at the LTA in our suitability report. We have a full section on it depending on the size of the pension fund. We do not just look at a client’s defined benefit (DB) pension in isolation. We look at every other pension asset, including any other DB pension and also any money purchase assets.

Assuming clients go into drawdown, we will also look at the second LTA test, which happens at age 75. This is measured by looking at how much has been taken out of the pension pot and how much the investments in the drawdown plan have grown. If there has been more investment growth than withdrawals, clients could hit the LTA when it is tested a second time.

Top tip: Make sure the client fully understands how the LTA works.

Eugen Neagu

Head of financial planning, Montfort International

An LTA tax charge could be a reason not to transfer out of a DB pension. The critical yield will increase. To achieve the same pension benefit from a flexible withdrawal, the withdrawal rate will increase, possibly above a sustainable rate.

But in certain cases, even with the LTA charge, it could still be suitable to recommend a transfer. Take into account that this charge is going to happen and have some credible assumptions about how much is going to be paid.

Time it right

The LTA charge is a tax on growth. Sometimes it is good not to hurry to crystallise because the market may go down. If you have a fund of £1.2 million and it goes down to £1 million, you end up paying no LTA charge.

But if it goes the other way, you still pay 25% but you pay on the growth so you want the difference. Timing the benefit crystallisation could pay off.

Act early

Because of the 20 times multiple, in many cases staying in a DB pension will not result in an LTA charge. Transfer values of £300,000 plus and more than £1 million, which is the LTA, are very common.

People under the age of 55 cannot even crystallise benefits to have the LTA test. In a personal pension, one way to avoid an increased LTA charge is by crystallising as soon as possible at age 55, even if the client does not need it.

Top tip: The key is timing when to take benefits. It can work in a client’s favour if the market drops.

What Twitter thinks

David Penney

Director, Penney, Ruddy & Winter

Take the LTA into account. Most transfer value analysis systems do not allow for it unfortunately.

Aron Gunningham

Senior paraplanner, Crowe Clark Whitehill

The last few I have seen were slightly beneficial remaining in DB from an LTA point of view (i.e. 20 times lower than the projected capital sum if transferred).

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