Year End Tax Review 2023/2024 – Blog 7 – Abolition of the Pensions Lifetime Allowance (LTA)

The Pensions Lifetime Allowance (LTA) has, in recent years, been frozen at £1,073,100. This puts a cap on the amount of tax-advantaged pension rights that you can build up. The value of all your pension funds was compared with this limit at certain ‘benefit crystallisation events’, such as when you first draw benefits or reach age 75. An onerous tax charge (the ‘LTA charge’) was incurred on any surplus above the LTA.

• The lifetime allowance charge has been abolished for 2023/2024 onwards

• The tax-free pension commencement lump sum (PCLS) remains £268,275 (25% x £1,073,100) unless the member holds a higher level of protection from when the LTA had previously been cut.

Planning points

• For those with large pension pots, the abolition of the LTA charge may change
  • the timing of your retirement; or
  • the level of contributions you might want to make before retiring.

Example – Asif

Asif is aged 58. He is employed at a senior level in his company and receives an annual salary of £210,000 (plus bonuses). He has a pension pot worth £990,000 but has no form of LTA protection in place.

In March 2021, he opted out of payments into his company pension scheme, given that he was getting close to exceeding the LTA and was therefore facing an LTA charge.

He plans to retire in early 2024.

• In view of the removal of the LTA charge and the increase in the maximum AA, Asif can have further inputs to his employer’s scheme.
• So, carrying forward his two years’ worth of unused AA relief, he can have total pension inputs of up to £60,000 + £40,000 + £40,000 = £140,000 for 2023/2024.
• It is now estimated that Asif’s pension fund may be worth in the order of £1.2m when he retires.
• Asif will fully crystallise his pension and then moves it into drawdown.
• His lifetime allowance tax charge is zero, but if he had completed the same steps in 2022, the excess tax charge could have been as high as £70,000.

Example – Mona

Mona is aged 57 and has a personal pension scheme valued at £1.6m. She planned to retire at the age of 60, due to her pension fund being worth more than the LA limit.

• Prior to 2023/2024, Mona’s excess of £1,600,000 – £1,073,100 = £526,900 would have suffered an LTA charge:
  • If taken as a lump sum, this would have been 55% when she accessed it.
  • This would have reduced the value of her pension fund by 55% x £526,900 = £289,795, i.e. to £1,310,205.
• In 2023/2024, without the lifetime charge arising, Mona will keep the full value of her £1.6m pot.
• The additional funds mean that she can retire immediately, enjoying a higher level of pension income than she had previously anticipated.

Note

If there is a change in Government at the upcoming General Election, it is almost certain that the Lifetime Allowance will be reinstated (although not retrospectively). What level it would be set at is currently unknown.

This emphasises the importance, especially for those nearing retirement age, of taking action sooner rather than later.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.