In his budget speech on Wednesday 15 March, the chancellor announced the removal of the Lifetime Allowance (LTA). Pension savers will no longer suffer a tax penalty if the value of their lifetime pension savings exceeds a certain value.
At the same time, the chancellor increased the Annual Allowance, which is the amount that can be saved tax-efficiently into pensions each tax year.
The chancellor announced changes to the LTA and the Annual Allowance
It is proposed that the LTA will remain in force for now, at its current level of £1,073,100. The rate of tax applied to the value of pensions exceeding the LTA, though, will now be 0%. From 6 April 2024, the concept of the LTA will be abolished completely, parliamentary time permitting.
The Annual Allowance of £40,000 is set to increase to £60,000. Those with very high earnings, and those already flexibly accessing their pensions, are subject to lower limits, which are also being increased.
Most pensions can provide a tax-free lump sum of up to 25% of the LTA. Once the LTA is abolished, the maximum lump sum will be capped at an amount equal to 25% of the current LTA. The introduction of a specific monetary cap on tax-free lump sums could provide a mechanism for future reductions.
Also, the government (or a future government) could look to offset the costs of these changes by looking at the current Inheritance Tax (IHT) treatment of pensions on death, especially as individuals will now be able to build up unlimited pension funds.
We will contact you if necessary when the changes are confirmed
It is worth mentioning that Labour, who are currently ahead in voting polls, have said they would look to reinstate a lifetime limit in some form. The next general election is due no later than January 2025.
For now, we await the details of the final bill and its passing into law. We will then be contacting clients likely to be affected so look out for further updates if you think this might be you.
Areas for consideration will be:
- Starting, re-starting, or increasing pension contributions if you were previously affected by the LTA.
- Re-starting your pension contributions if you benefit from a higher personal LTA (enhanced protection or fixed protections), which previously prohibited you from making further pension contributions.
- Increasing contributions if you previously paid up to your Annual Allowance.
- Taking the maximum tax-free cash lump sum if you are concerned about possible future reductions to the new monetary limit.
- Taking money from your pensions before the next election.
- Reviewing your estate planning strategies to reduce dependence on the current inheritance tax-free status of pension funds.
In the meantime, if you have any questions, please contact your financial planner at HA&W.
Please note
This article is for information 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.
