FOR ADVISERS ONLY

Lifetime allowance - opt in or out of an employer's pension scheme

A case study about somebody who needs to decide whether to opt out of their employer's defined contributions scheme as they are close to the lifetime allowance.

Steven lives in England, is a 40% taxpayer aged 55, with pensionable salary of £80,000.

Steven plans to retire when he is 60 and is considering whether to opt out of his employer’s DC scheme.
His employer currently pays 6% contributions, Steven pays 6% contribution.
His fund has a current value of £930,000.

	Steven opts out	Steven stays in the scheme Employer contribution only	Steven stays in the scheme Employer and employee contribution 6%
Option	A	B	C
LTA in 5 years’ time	£1,184,789	£1,184,789	£1,184,789
Starting fund at 6 April 2018	£930,000	£930,000	£930,000
Net Cost to Steven	£0	£0	£15,517
Fund at retirement	£1,131,487	£1,159,447	£1,187,408
LTA Excess	£0	£0	£2,619
LTA charge (excess taken as lump sum)	£0	£0	£1,440
LTA excess lump sum	£0	£0	£1,179
Pension fund after charge	£1,131,487	£1,159,998	£1,185,968

Assumption 1: LTA increases by 2% each year.
Assumption 2: Steven’s pensionable salary increases by 2.5% each year.
Assumption 3: Investment growth net of charges is 4% p.a.

Steven’s adviser explains the situation to him as follows:

If Steven remains in his scheme with employer contributions only (Option B), based on the assumptions the adviser has agreed with him, he will face no LTA tax charge on retirement at age 60.
The adviser emphasises the value of the employer contributions and explains that opting out altogether would therefore be disadvantageous to Steven.
Option C produces a higher pension fund net of the LTA charge, but this comes at a cost to Steven. When compared to option B, Steven will accrue additional net funds of £25,970 for a net cost to him after tax relief of £15,517.

The adviser explains that based on the assumptions they’ve agreed about Steven’s likely future pay rises and the investment funds chosen, the potential benefits from remaining in the scheme and continuing to benefit from employer and personal contributions outweigh Steven’s costs including the LTA charge. The adviser ensures Steven understands that if reality differs from the assumptions used, the position could change, and that they should therefore regularly review the position.

The adviser goes on to explain that Steven’s employer does not offer any alternative benefits/payments if an individual opts out of the pension scheme so there are no other options to be considered.

Adviser's recommendation
Steven remains in his scheme and continues to pay personal contributions of 6%.

Further information

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.