In his 2023 Spring Budget, chancellor Jeremy Hunt announced a raft of changes to pension tax rules. One of the most significant changes was the abolition of Lifetime Allowance (LTA) charge.
This could help more people to continue working for longer, particularly GPs and consultants in the NHS. The British Medical Association reports that the LTA has been one of the major factors in many of these doctors choosing to retire early in recent years.
However, with the LTA having been abolished on 6 April, this overhaul has created some confusion about how the new rules will be implemented.
We asked Matt King to tell us more about the abolition of the LTA and what it could mean for you.
The Lifetime Allowance limited how much you could save into your pensions tax-efficiently
The LTA referred to the total amount you could save into your pensions over your lifetime before incurring an additional tax charge when you chose to withdraw it.
In 2022/23, the LTA was £1,073,100. If your pension pot exceeded this amount when you decided to withdraw from it, you would have faced a tax charge of 55% if taken as a lump sum, or 25% if taken as income on top of your marginal rate of Income Tax.
A report from Professional Adviser shared that, as of July 2023, 16% of taxpayers had stopped contributing to their pension because they were approaching the LTA.
Abolition of Lifetime Allowance charge was removed for 2023/24 and the threshold has been abolished as of 6 April 2024
In his Spring Budget for 2023, chancellor Jeremy Hunt announced that the government would remove the tax charge for exceeding the LTA from 6 April 2023. He has also confirmed that the LTA would be abolished entirely in future, which was confirmed to be from 6 April 2024 at the chancellor’s 2023 Autumn Statement.
This means that, even if your pension pot exceeded the previous LTA threshold, if you began to withdraw from it after 6 April 2023, you would not have faced the additional tax charge on withdrawals in excess of the LTA; you would only have paid Income Tax, where necessary, on your income from the pension.
These changes have created increasing demand for financial advice about pensions and retirement. Professional Adviser reports that 49% of firms offering retirement advice have seen an increase in demand for their services since the announcement. This is no surprise, as the rules surrounding pensions and tax can be complex. Without a thorough understanding of the rules, or guidance from an expert, you could end up overpaying on tax.
New allowances will replace the Lifetime Allowance
Even though the abolition of lifetime allowance will go ahead, there are still some rules to be aware of. The government has introduced three new allowances for the 2024/25 tax year that could affect you.
1. Lump Sum Allowance
The Lump Sum Allowance (LSA) is the maximum amount that you can withdraw tax-free from your pension when you first begin drawing from it. In the 2024/25 tax year, you will be able to access £268,275 or 25% of your total pension pot, whichever is lower. Any withdrawals you make above this threshold will be liable for Income Tax at your marginal rate.
2. Lump Sum and Death Benefits Allowance
The Lump Sum and Death Benefits Allowance (LSDBA) is the limit placed on tax-free lump sums and the tax-free element of other lump sums paid during your lifetime and on death. The LSDBA is £1,073,100 in 2024/25.
The LSDBA will apply at a “relevant benefit crystallisation event”, when someone dies, or on the payment of a serious ill-health lump sum. A relevant benefit crystallisation event refers to the tax-free element of the benefits you are taking.
3. Overseas Transfer Allowance
The Overseas Transfer Allowance (OTA) takes the place of the LTA for any transfers you make to qualifying recognised overseas pension schemes (QROPS). A 25% overseas transfer charge (OTC) will apply to any amount that exceeds the OTA. In 2024/25, the OTA is £1,073,100.
It is important to note that:
• If you have taken out LTA protection, your personal allowances may be higher than those stated above.
• If you have taken any benefits between 5 April 2006 and 6 April 2024, your personal allowances may be lower than is stated above.
How will the abolition of lifetime allowance affect your retirement plans?
If your pension had been approaching the LTA prior to its abolition, the new rules might offer you some opportunities to continue contributing to it.
For example, if you had been considering retiring to avoid the tax charge of exceeding the LTA, you may now choose to continue working for longer. Moreover, you may choose to resume making pension contributions if you had paused or reduced them to avoid exceeding the LTA.
Either of these choices could enable you to benefit from tax relief on pension contributions for longer, provided they are within the Annual Allowance. In 2024/25, the Annual Allowance is £60,000 or 100% of your earnings, whichever is lower. If you are a high earner or have already flexibly accessed your pension, your Annual Allowance may be lower than this.
Your financial planner can help you navigate the rules surrounding pensions and taxes
Though the abolition of lifetime allowance offers some opportunities to further grow your pension pot, the new rules that the government has introduced can be complex.
If the abolition of lifetime allowance will have an impact upon you and if you would like help navigating these rules and ensuring you pay the correct amount of tax while also saving towards your retirement goals, we can help.
To arrange an initial meeting with no obligation, please contact us at hello@rpgcc.co.uk or call 0203 697 7147 to speak to us. Alternatively, you can visit our web chat in the bottom right corner, which we respond to personally during office hours or you can leave a message out of hours.
Here at RPGCC our team is always just a click or call away, telephone us on 020 7870 9050.
Important note
This article on the abolition of lifetime allowance is for general information only and does not constitute advice. The information is aimed at retail clients 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. The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
