In his 2023 spring Budget, the chancellor announced plans to scrap the pension Lifetime Allowance (LTA) and increase the Annual Allowance (AA). You may have read about these changes in our blog, Recent changes to the Lifetime Allowance and pension Annual Allowance – An HA&W update, published online in May.
In this article, we will focus on the changes to the LTA and its effects on tax-free lump sums and pension death benefits. But first…
A brief LTA lesson
Deep breath in…
The LTA system is based around a series of benefit crystallisation events (BCEs), of which there are 13 different types!
Put simply, when you access money from your pension, you might trigger a BCE. You could also trigger one when you reach age 75 or when you die.
Each time you trigger a BCE, the value of this event must be tested against your remaining LTA. Your personal LTA is £1,073,100 (though it could be higher if you applied for one of the previous LTA protection options, of which there were seven).
…and relax.
Some LTA changes have already come into force
The LTA changes are being made in two stages.
The first has already happened. The Finance Bill set out in the spring Budget has now become law. The immediate effects are:
- The LTA will remain for 2023/24 and the BCE regime must still be followed, but the rate of tax applied to any LTA excess has been reduced to 0%.
- Lifetime tax-free lump sums will still be limited to a maximum of 25% of your LTA in most cases.
- Those who have previous LTA protection will be able to accrue new pension benefits without affecting their higher personal LTA.
That’s the easy bit.
During 2023/24 the government plans to remove the LTA system completely. They have issued some draft legislation and a policy statement. There are still some issues to be covered, and as usual, the potential for changes once interested parties have responded.
New proposals introduce two new allowances
Current proposals will look to remove the current BCE system. Instead (from 2024/25 onwards), only lump sums will be tested, and against two new allowances:
- The Lump Sum Allowance (LSA) – This will be an overall limit on tax-free lump sums and the tax-free element of other lump sums paid during your lifetime. Your personal LSA will be £268,275, or higher if you applied for one of the previous LTA protection options.
- The Lump Sum and Death Benefit Allowance (LS&DBA) – This will be the overall limit on tax-free lump sums and the tax-free element of other lump sums paid during your lifetime and on death. Your personal LS&DBA will be £1,073,100, or higher if you applied for one of the previous LTA protection options.
It appears that the intention is for all pension income to become taxable under the new regime.
If so, this means that on death before age 75, there will no longer be the option for beneficiaries to draw a tax-free income as only funds paid as a lump sum (within the LS&DBA limit) will be tax-free.
With the end of the BCE system, pension providers will cease to create a record of LTA usage after 2023/24. That could make a future reinstatement of the LTA unlikely. A new government may look at more widespread changes to the pensions tax regime, such as tax relief on contributions and the Inheritance Tax-free status.
3 important steps you should take now
With some changes already in place and others due to come into force soon, now is the right time to consider your options.
Here are three factors to consider:
1. If you have ever opted out of a workplace pension to avoid losing your LTA protections, you should now consider rejoining.
2. If you have crystalised funds exceeding or close to the LTA, consider crystallising your remaining funds. Note, though, that there is no immediate pressure and, with more issues to be clarified, we would recommend exercising caution.
3. Your death benefit instructions must be kept up to date. Once the remaining issues are clarified, we will consider what further actions you should take.
Get in touch
If you wish to discuss any of the above, please contact us now to find out how our Chartered financial planners could help you.
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.
