Our Guide to the Lifetime Allowance Changes

Understanding the new Pension Changes
 

The big news in Jeremy Hunt’s 2023 spring Budget was the unexpected abolition of the Lifetime Allowance (LTA) charge. The complete abolition was certainly not one that I had on my budget bingo scorecard! 
 

Until the budget, the LTA stood at £1,073,100, an all-round relatively unstable figure that had been increased, decreased and frozen before it was eventually scrapped.
 

What was the LTA and why was it scrapped?
 

By way of a reminder, the aim of the LTA was to limit the amount of tax-privileged benefits that can be accumulated by an individual across all of their pensions. This change will come into affect on the 6th April 2024.
 

It was calculated and tested when benefits are drawn (or at age 75 if earlier) which is a ‘benefit crystallisation event’.
 

These benefit crystallisation events would use up all or part of the LTA and once the limit had been reached, the payment of any additional benefits will give rise to a tax charge. 
 

The rate was 25% for income payments subject to a marginal rate of tax, and 55% for lump sum capital payments.
 

With the LTA charge being abolished, pension savers need no longer worry about the overall value of their pension in this context. 
 

Labour has previously said it will reinstate the lifetime allowance, although there is no publicised plan as to how exactly they would go about this. 

We of course are now likely in an election year, it is hard to imagine the electoral winner completely scrapping these detailed new rules, although further tweaks are always a possibility (and going off the LTA since 2006, very likely!).
 

What are the new pension allowances?
 

So, what does this mean for individuals? Are we now… unlimited? Well, unfortunately not!
 

There are effectively now three new allowances to consider:
 

1. Lump Sum Allowance (LSA)
    
2. Lump Sum and Death Benefits Allowance (LSDBA)
    
3. Overseas Transfer Allowance (OTA)
    

Lump Sum Allowance (LSA)
 

The standard lump sum allowance (the 25% element you can take tax-free) will now be capped at £268,275 with no provisions in legislation to increase this. As the mathematicians reading may have noticed, this is 25% of the old LTA so there is effectively no change in the amount of tax-free cash that can be taken. 
 

Those with LTA protection will be given an LSA based on their protected LTA, although treatment of transitional protections will be another separate blog post so watch this space!
 

Lump Sum and Death Benefits Allowance (LSDBA)
 

The standard lump sum allowance (a cap on the tax-free death benefits available from a pension) will now be capped at £1,073,100 with no provisions in legislation to increase this. As with the LSA, those with protection will have their LSDBA set in line with their LTA protection. 
 

The implementation of the LSDBA does not mean an increase in tax payable on pension benefits on death where the pension benefits have not yet been crystallised compared to the rules under the LTA. 
 

This is because prior to 6 April 2023, a 55% LTA tax charge would have applied to the value of any excess uncrystallised funds lump sum death benefit over an individual’s available LTA. Now that the LTA tax charge has been removed, any excess uncrystallised funds lump sum death benefits will be subject to Income Tax at the beneficiaries’ marginal rate (up to 45%).
 

What does this change mean for you?
 

It will have a detrimental impact for any individuals who die before age 75, have crystallised funds in excess of their LSDBA where they have already drawn some of their pension benefits. 
 

Under the old LTA rules, the value of crystallised pension benefits in drawdown, or flexi-access drawdown, or as a dependant’s annuity, are not tested against the LTA on death and can be passed on to completely tax free. 
 

From 24/25 tax year onwards, should an individual pass away before age 75, the value of their pension benefits on death will be tested against the LSDBA and any excess will be taxed at the beneficiaries’ marginal rate of income tax. 
 

What might change in the future?
 

Overseas Transfer Allowance (OTA)
 

This one will impact a lot less of us than the LSA/LSDBA, but worth noting. 
 

Largely noticed by those of us who have specialised in pensions for some time, the BCE 8 test is now being substituted with the OTA. The OTA is linked with an LSDBA and the existing overseas transfer charge (OTC). Any transfer to a QROPS exempt from the current OTC will undergo test against the OTA, and any surplus beyond the allowance will incur the overseas transfer charge, currently set at 25%.
 

Conclusion
 

The above is a welcome change to many with large pension funds or plans to accumulate them, but as with any legislative change – there are several nuances that are important to be aware of and bespoke advice on your specific circumstances is important in ensuring that you take advantages of the opportunities available. 
 

To speak to one of our team about the LTA and how you can navigate the changes, send us a message.
 

Sources

https://www.gov.uk/government/publications/lifetime-allowance-guidance-newsletter-march-2023/lifetime-allowance-guidance-newsletter-march-2023