The Lifetime Allowance

The Lifetime Allowance

The Lifetime Allowance (LTA) is an overall limit on the value that may be withdrawn from any registered pension fund, below which no tax charge would be imposed. The LTA also applies a limit on the maximum amount of tax free cash that may be drawn from a pension fund.
The LTA for the 2023/24 tax year is £1,073,100 and for most people the maximum lump sum is one quarter of this amount, i.e. £268,275.

When benefits are accessed (at retirement, age 75 or on death prior to age 75) any previously untested pension funds are tested against any remaining lifetime allowance. Where the value being tested exceeds the remaining allowance the surplus is subject to a LTA charge. Prior to 6 April 2023 this was 25% with the balance left in the pension fund then subject to income tax when withdrawn at a later date.

In the 2023 Spring Budget, the Chancellor announced that the LTA would be abolished from 6 April 2024 as there was insufficient time to change legislation prior to 6 April 2023. To address this for the 2023/24 tax year, the charge has been reduced from 25% to 0%. The current maximum of tax free cash (TFC) of £268,275 will now be frozen, with no suggestion of any future indexation.

Transitional protection was made available at the point the LTA was introduced and each time the LTA limited was reduced, allowing individuals to maintain a higher personal lifetime allowance and a higher tax free cash lump sum entitlement. HMRC confirmed that anyone with fixed protection, or enhanced protection in place as at 15 March 2023, will be able to accrue new benefits from 6 April 2023 without losing their existing protected tax free cash amount. No comment has been made in relation to ‘Individual Protection’.

These changes bring about a number of planning opportunities for certain individuals, but before touching on these it is important to address a political point.

The Achilles’ Heel

Following these announced changes by the Conservative Chancellor (Jeremy Hunt) in March, Rachel Reeves (Shadow Chancellor) stated that “a Labour government will reverse this move”. As the next general election must be held before 25th January 2025 there is a degree of uncertainty as to the future landscape for large pension funds.

Planning Opportunities

The legislative changes announced bring about opportunities for some, the announcement by the Labour government may mean that the changes provide a ‘window of opportunity’ that may close at the next General Election. The following are examples of where advice and appropriate planning opportunities exist:

Making Contributions

Many individuals will have stopped funding their pension (or potentially opted out) either mindful of the value of their future pension fund relative to the LTA or because they hold enhanced or fixed protection – these individuals may start funding their pension again, benefit from carry forward relief and from tax relief of up to 45%, i.e. for some a £100K gross contribution will cost them £45K from their take home pay.

Transfers

For those who hold enhanced or fixed protection on 15 March 2023, they are now able to transfer their pension fund without losing their transitional protection. This may provide an opportunity for those who have until now been stuck with their existing pension administrator

Taking Benefits

Whilst advice previously resulted in an LTA test being deferred until age 75 (for some of the pension fund), it may be appropriate to bring this forward to before the next general election. The quantum of the potential tax saving if Labour reverse the changes made can be significant. For example, an individual with £1m in excess of the LTA today will face an LTA charge of £Nil, if reversed this charge would result in a tax take from their pension fund of £250,000.

If you feel that the above is or may be relevant to you in relation to your overall pension benefits then please do get in touch to discuss your situation further and so that we may place you in a more informed position. Below you can book a meeting directly with one of our advisors: