In his 2023 Spring Budget, the chancellor, Jeremy Hunt, confirmed the UK government’s intention to scrap the pension Lifetime Allowance (LTA).
He further announced that the changes required to facilitate the removal of the LTA would be made in two stages.
The first has already happened. The Finance Bill that emanated from the 2023 UK Budget has now become law. While the LTA was retained, the bill reduced the tax rate being applied to any LTA excess to 0%, effectively doing away with the charge.
The bill also fixed the maximum tax-free amount you can take from your pension to up to £268,275.
The second stage is new legislation that has now been published. In this article, you can read about some of the key changes proposed, and how you may be affected.
There will be 2 new allowances
Rather than limiting the amount of pension fund you could accrue tax-efficiently – as was the case with the LTA – the new legislation will mean that only lump sums will be tested and potentially limited. This is designed to be effective from April 2024.
Two new allowances are to be introduced for this purpose:
- 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 25% of your pot up to a maximum of £268,275, which is 25% of the previous LTA threshold.
- The Lump Sum and Death Benefit Allowance (LSDBA) – 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 LSDBA will be £1,073,100, equivalent to the previous LTA threshold.
In each case, your figure could be higher than that stated if you have previously applied for one of the previous LTA protection options.
In simple terms, the LSA will cap tax-free cash from pensions paid during your lifetime, and then the LSDBA will limit the tax-free amount paid to your beneficiaries after your death.
Furthermore, if you die before you reach age 75, any subsequent lump paid to your beneficiaries will only be exempt from tax if it doesn’t exceed your LSDBA.
There is no limit to the amount you can tax-efficiently accrue in your pension fund
The new legislation confirmed the key point that came out of the changes announced in the 2023 Budget.
You can now boost your pension contributions without the fear that your fund could be subject to an LTA tax charge.
Previously, if the value of your fund exceeded the LTA (£1,073,100 in 2022/23) you would pay a 55% charge on funds drawn as a lump sum, or 25% on funds drawn as income. This would be on top of your marginal rate of Income Tax.
However, it’s important to note that, with the exception of your LSA, any money you draw from your fund will be taxed as income.
This change clearly makes drawing income as tax-efficiently as possible in retirement an important part of your financial planning.
The increase to the Annual Allowance means you can pay more into your fund each year
As well as removing the LTA, enabling you to boost the amount you can accrue in your fund tax-efficiently, the 2023 Budget also saw an increase in the amount you can contribute in a tax-efficient way each tax year.
You can now contribute up to £60,000 or 100% of your earnings – whichever is the lower figure – and benefit from tax relief on those contributions.
Your Annual Allowance may be lower if you are a high earner or have already flexibly accessed your pension.
To further help you boost your retirement fund, don’t forget that you can also carry forward any unused entitlement from the three previous tax years, as well as maximising your contributions in the current tax year.
An election in 2024 makes the future hard to predict
It’s important to bear in mind that, in the aftermath of the chancellor’s announcement in April 2023, the Labour opposition pledged to reinstate the LTA if elected in 2024.
According to PensionsAge, the shadow chancellor Rachel Reeves called it a “gilded giveaway” and promised that “a Labour government will reverse this move”.
Having said that, these pledges were made prior to actual legislation being tabled. You should get a clearer idea of what will happen if Labour does win the next general election as the new changes are debated in parliament.
While there is no way of knowing the outcome of the next general election, future uncertainty makes focusing on your long-term retirement plans important, and it would be prudent to seek professional advice if you have concerns about how any changes could affect you.
You could be affected by transitional provisions if you have already drawn from your fund
One of the unknowns before this new legislation was published was how the previous rules would interact with the new.
This is particularly applicable if you have taken benefits from your fund in some form – lump sum or income – before now, and as a result used up a percentage of your LTA under the old system.
The new legislation will introduce a set of transitional provisions for pre-2024 benefits, in which the available amount of LSA and LSDBA under the new system will be reduced based on the amount of LTA you previously used.
This reduction calculation will take place the first time you draw from your fund on or after 6 April 2024.
The changes could affect you if you’re planning to retire in Australia
Another change confirmed by the publication of the proposed new legislation could affect you if you are planning to move to Australia with a view to ultimately retiring there.
At the present time, it is possible – subject to certain terms and conditions – to transfer your accrued UK pension fund to an Australian super fund by means of a Qualifying Recognised Overseas Pension Scheme (QROPS), which can currently be made completely free of UK tax provided certain conditions are satisfied.
Under the terms of the new legislation, such transfers will be subject to the 25% overseas transfer charge if they exceed your overseas transfer allowance, which is the same as the previous LTA limit.
Again, if you have any questions or concerns about how this could affect you, we would strongly recommend you take professional advice.
Get in touch
If you’d like to talk about how these changes could affect you or, indeed, any aspect of your financial planning, please get in touch with us.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
All contents are based on our understanding of current and proposed ATO and HMRC legislation, which could be subject to change.
