Small pension pots could still breach Lifetime Allowance

11 March 2014

Pension savings of just £72,000 could compound to breach the new lower Lifetime Allowance, according to Chase de Vere.

From April pension savers will be facing a new cap on their pensions saving, with the Lifetime Allowance reducing from £1.5 million to £1.25 million.

Any savings in excess of this will be subject to tax of up to 55%.

While many savers won't think this seemingly vast limit could ever apply to them, the effects of compounding over the long-term could see one in five in danger of breaching the allowance.

According to research from Albion Ventures, financial advisers estimate that some 19% of their clients could fall foul of the new limit.

This is backed up by figures from financial planners Chase de Vere, which show that current pensions savings of just £72,000 could grow at an average annual rate of 10% and breach the limit in 30 years without making any further contributions. That means individuals have to make a decision about whether to continue saving into their pension when they are as young as 35.

If annual growth were a more modest 5% a year then your pot would have to already be a hefty £290,000 if it were going to breach the LTA in 30 years time.

At an annual growth rate of 10%, meanwhile, a current fund of £300,000 could breach the allowance in just 15 years.

Chase de Vere says it is a reminder that savers should focus on non-pensions savings too, unless they live in the hope that future governments will re-raise the LTA. That seems unlikely though; according to Albion Ventures, some 41% of IFAs anticipate that it is likely to rate will be lowered further in the future. Others (23%) predict it may become inflation-linked.

Albion says the dilemma makes other investments, such as in Venture Capital Trusts (VCTs) ever more important.


Patrick Reeve, managing partner of Albion Ventures, says: "Diversification has become a retirement watchword and as a result VCTs are becoming an increasingly popular pension supplement, particularly given their ability to deliver a regular tax-free income."

Those who are concerned about breaching the allowance can apply for fixed protection, which would allow them to mitigate the effect of the reduction in LTA as long as they make no further pensions contributions in the future. If they do make any more contributions they immediately lose that protection and the additional allowance.

This article was written for our sister website Money Observer

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