Transfer Advice – LTA issues

There are some very large transfer values being quoted currently. Many clients might have to consider the impact of the Lifetime Allowance on their pension benefits. Transferring can make the LTA position worse and be a constraint on future contributions. We asked Paul Clark of Russelldene Consulting to comment.

Paul Clark

Currently, CETVs can often be significantly higher in value than the LTA value placed on the DB benefits. This will mean that if the CETV proceeds the client will utilise a greater percentage of their LTA when benefits are crystallised having transferred.

For some clients this will not be an issue, as together with their other benefits, the LTA will never be an issue. However, there are circumstances where it is important to clearly explain the potential issue to the client as a part of the transfer suitability report:

  • There will be some clients who are looking to crystallise shortly after completing their transfer, and the CETV will mean that together with their other pension funds they will exceed the LTA now. These cases are relatively easy to spot and it is simple to quantify the implications of exceeding the LTA.
  • There will be some clients who are transferring, but not intending to crystallise immediately, perhaps intending to continue working into their 60s and even beyond. However, because of the level of the CETV their pensions can reasonably be expected to exceed the LTA prior to when they were originally intending to crystallise. This is a more complex scenario, as the point in time that the LTA is exceeded will of course depend upon assumptions made for future inflation and investment returns. So, it is known there will probably be an issue, but not the extent of the problem. This needs to be addressed in the suitability report and options set out as to how the potential issue can best be mitigated.
  • There will be some clients who are some way off crystallising. It can be assumed that the CETV will deliver a higher LTA value that the DB pension, but by how much is pure guesswork. The client is likely to be working for another 20 or more years and contributing towards their pension arrangements. Will the value of the CETV give rise to the funds eventually exceeding the LTA at some point in the future? Will that mean the client might have to reduce or stop pension funding and miss out on valuable income tax reliefs? Will the client end up being caught by the tapered annual allowance in the future and so will have to reduce pension funding anyway?

The ability to accurately forecast the scale of the issue, becomes ever more difficult/impossible with each of these scenarios. However, not to address the potential issue in the suitability report will leave an adviser open to a potential complaint. In addition, if there is a (greater) LTA liability as a result of taking the CETV, this will increase the critical yield. Again, this will need to be addressed in the TVAR as well as in the suitability report.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Transfer advice has no shortage of dangers for unwary advisers and clients. The LTA issue is just another that needs to be considered when appropriate.

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Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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