Joseph Bacon
Private Client Adviser
One of the surprise announcements of the 2023 Spring Budget was the abolition of the pension Lifetime Allowance (LTA).
Previously, the LTA had limited the amount of pension wealth an individual could accrue in their lifetime without facing an additional tax charge when, for example, they came to withdraw from the fund. At the time of its abolition, it stood at £1,073,100.
While the tax charge relating to the LTA was removed in the 2023/24 tax year, the LTA itself will disappear altogether on 6 April 2024.
Although this will certainly be of benefit if you have significant pension wealth, the finer details of the rule changes introduce fresh issues that mean your planning will need further consideration. Read on to find out why.
Removal of the LTA means you can continue to accrue tax-efficient pension wealth
The removal of the LTA means any amount can be withdrawn from your pension benefits without suffering a Lifetime Allowance charge – but remember this will still be subject to Income Tax at your marginal rate.
This is clearly a benefit if your pension fund is at, or is likely to grow to, a level that exceeds the previous LTA of £1,073,100.
The move was designed to encourage more people to stay in work for longer, safe in the knowledge that they could continue to accrue pension wealth from their earnings without the risk of a significant tax charge later on.
The changes mean that, if you’re already at or approaching the previous LTA limit, further contributions to your pension won’t attract any additional tax benefits in the future, as you won’t be able to take any more as a tax-free lump sum.
However, further contributions may still be advantageous if your expected marginal tax rate would be lower in retirement. In addition, making further pension contributions can result in a National Insurance saving if you use “salary sacrifice” to make the contributions.
Cashflow planning can help provide you with a visual example to highlight how these changes could affect your benefits and tax position in retirement. Please speak to your adviser to see how this might work for you.
Your tax-free lump sum will still be limited by the previous Lifetime Allowance
As mentioned earlier, the removal of the LTA will likely have a positive impact on many wealthy individuals. You’ll be able to accrue pension savings above the previous limit without a concern that you’ll pay an additional tax charge of 55% for a lump sum, or 25% if you draw as income.
However, the new rules do not mean you can simply take a tax-free lump sum equivalent to 25% of your total fund value.
Instead, authorised lump sums and lump sum death benefits will be tested against a new threshold, set at the same level as the present LTA of £1,073,100. This means the maximum tax-free pension commencement lump sum (or uncrystallised funds pension lump sum) you can take will be £268,275 – irrespective of the overall size of your pension fund.
The exception to this is if you have already taken LTA protection.
Any lump sums paid above this level will be taxed at your (or your beneficiaries’) marginal rate of Income Tax.
Careful planning will be needed to manage your tax-free entitlement
Where complexity will remain is when it comes to the tax-free entitlements during your lifetime or for your beneficiaries on your death (if the benefits are in a form that can be inherited) as these are still limited.
On 6 April, the LTA is effectively being replaced by two new allowances:
- The Lump Sum Allowance (LSA) – £268,275
- The Lump Sum and Death Benefit Allowance – £1,073,100.
The Lump Sum Allowance applies when tax-free benefits are taken. Any amount of pension commencement lump sum or the untaxed part of an uncrystallised funds pension lump sum is deducted from this allowance of £268,275. The remaining amount, the income part, is taxed at your marginal rate of tax.
When it comes to paying benefits on death, from 6 April 2024, benefits are tested against the deceased’s Lump Sum and Death Benefit Allowance, rather than the LTA.
While the tax treatment of benefits pre- and post-age 75 will remain the same, benefits above the Lump Sum and Death Benefit Allowance are taxed at the recipient’s marginal rate.
Ultimately, the new rules will require careful tracking of your pension benefit usage, so you remain fully aware of your position.
While the removal of the LTA is welcome news, complex quirks on how the rules will apply make the need for ongoing advice greater than ever before.
Get in touch
If you want to find out how changes to the LTA could affect you, please get in touch.
Contact us online or call 020 7400 4700.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.