Lifetime allowance cut: Ten things you need to know

Axa Wealth's Andy Zanelli on ten key facts advisers should know about the forthcoming reduction to the lifetime allowance...

The government has announced that the lifetime allowance (LTA) will reduce from the current level for 2011/12 of £1.8m to £1.5m from 6 April 2012.

1. The LTA was introduced at A-Day (6 April 2006) and clients could have expected to have an LTA of around £1,947,000 under the original proposals (assuming a 4% increase after 2010/11).

2. As well as the current forms of protection for those with large pension funds, primary and enhanced, we will now have a new variation called ‘fixed' protection.

3. It is easy to identify those clients with funds already over the new £1.5m limit. There are now many thousands of clients who will need to be advised whether their current fund value, contributions and growth may cause them an issue in the future.

4. Most people with existing primary or enhanced protection will be unaffected by the reduction in the LTA - although some are, for example, for those with enhanced protection but less than 25% tax-free cash, this will drop from £450,000 to £375,000.

5. Fixed protection needs to be applied for by the 5 April 2012, however the application form is not available yet! This will be paper only, with no online application facility.

6. Those clients who were planning to take advantage of trivial commutation of smaller pension funds will not see the level reduced - it will remain at its current level of £18,000.

7. Individuals with scheme specific tax-free cash protection will also be unaffected as their entitlement will be underpinned at the current level of the LTA.

8. To retain fixed protection no new contributions can be paid to a money purchase arrangement, only limited increases will be allowed to defined benefit or cash balance arrangements and you cannot set up a new pension arrangement under a registered pension scheme unless it is to receive a transfer of existing pension rights.

9. Fixed protection will almost certainly be lost if a pension credit under a pension sharing order is not paid into an existing money purchase plan.

10. For many clients who may be affected by the reduction to the LTA in the future, it may be the right time to revisit the underlying asset allocation of their pension investments and reduce the risk of the portfolio. If not, a large proportion of the return may be lost in tax.

Andy Zanelli is head of technical sales at AXA Wealth