Jeremy Hunt’s announcement in his Budget that the pension lifetime allowance is being scrapped means those who have built up substantial wealth in their pension pots can feel less constrained about how they manage or administer their future contributions.
But do the changes also mean pension savers, and their advisers, should be thinking differently about how a pension portfolio is constructed?
Thinking about risk
Marc Meshaka, head of investment at Y Tree, an adviser technology provider, says clients investing via a pension may in the past have not wished to take higher levels of risk in their pension portfolio, even if their tolerance of risk is generally high, because they feared that if the risks delivered high returns and pushed the value of the portfolio beyond the LTA limit then the returns would be eroded by the subsequent tax bill, making it not worth taking the enhanced level of risk.
Meshaka’s view is that some high net worth clients would have kept their riskier investments away from the pension pot for this reason, but now can include them, freeing up the space for other assets in other tax-efficient wrappers.
Josh Ross-Field, investment director at Dowgate Wealth, says: “One other impact of the LTA is it reduced a lot of the benefits of taking risk in pursuit of growth for pensions which were greater than the allowance.
"This is because a significant portion of the upside that you may capture would be taxed away; with the abolition of the limit pension investors can now benefit from these potential gains.”
But he cautions against investors against placing all, or most, of their wealth in a tax wrapper, such as a pension, as there is always the potential for future governments to change the rules.
He adds: “Your investment strategy and risk profile will be determined by a number of factors, including investments outside of your pension, current income and length to retirement. “
As part of the reforms announced in the Budget, the tax-free lump sum an individual can take from their pot at age 57 is capped at £268,275. Previously an investor could take up to 25 per cent of the pot, and as the pot was effectively capped at £1mn, this made the maximum that could be withdrawn tax free just over £250k.
Jason Hollands, head of corporate affairs at wealth management firm Evelyn Partners, says the impact of the abolition of the LTA on asset allocation in pension portfolios will be limited because the other factors that impact it, such as life expectancy and income requirement in retirement.
Higher risk assets may be those which are highly volatile and so an investor with a shorter-term time horizon may not find them interesting as it may be they come to sell the assets during one of the more volatile periods.
It may also be the case that such assets do not pay an income immediately and are owned for capital gain purposes in the future.
