Financial advisers need to prepare clients for the lifetime allowance increase coming into force in April 2018, Nucleus has said.

According to the firm, advisers should work with clients who are taking pension benefits over the next few months, who may be affected by the lifetime allowance. “The timing of taking benefits may be crucial in managing these clients’ tax charges,” Nucleus highlighted.

The LTA was introduced in 2006 and stipulates that individuals have a single lifetime allowance whereby if the accumulated value of benefits they take is greater than this allowance, then the excess is subject to the lifetime allowance charge.

After rising from £1.5m in 2006 to £1.8m in 2010, the LTA has gradually reduced to £1m over the last five years. Despite this, the allowance will begin to rise again from next April. According to the Finance Act 2016, starting from 2018/19, the allowance for every tax year will grow by the rate in CPI. The rate used will be the September rate.

The Treasury confirmed its decision to increase the LTA in July. Both July and August saw CPI rates stand at 2.6 per cent, among speculation that the rate is generally increasing. If the rate was 2.6 per cent, the new LTA would be £1,026,000. The exact rate will be confirmed on 12 September 2017.

Nucleus product technical manager Rachel Vahey commented: “After five years of chipping away at pensions tax allowances, the lifetime allowance will reverse direction and start to increase from April next year in line with inflation. Although it may only be a small percentage increase, the rise in the lifetime allowance may have big consequences for some clients and mean substantial tax savings.

“Advisers will need to work with their clients who are thinking of taking benefits over the next few months, and for whom the lifetime allowance may be an issue. These clients may want to consider delaying taking benefits until next April, as they may be able to cut - or even eliminate - the amount of tax they have to pay. Also, as the amount of any benefits taken when tested against the lifetime allowance is expressed as a percentage of LTA, if clients delay taking benefits until after April the amount used up will be a smaller percentage of LTA giving themselves additional ‘wriggle room’ and possibly reducing any lifetime allowance charge they have to pay.”

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