In his 2023 Spring Budget, UK Chancellor Jeremy Hunt scrapped the Lifetime Allowance (LTA). This was confirmed in the Autumn Statement, and the abolition was later legislated in the Autumn Financial Bill 2023.
While this is good news for many pension savers and international expats, the change and its effects are more complex than you may realise.
Read on to find out more detail on the LTA change and new allowances that could affect you and your pension savings.
Before: The LTA set a limit on the value of tax-efficient pension savings
Before the LTA was removed, the LTA threshold was £1,073,100. This sum covered the total value of your pension assets, incorporating your contributions, your employer’s contributions from your workplace pension, tax relief, and investment returns.
When you took benefits from your pension, the LTA was applied. If the value of your combined pensions exceeded the £1,073,100 limit you may have been charged additional tax at a rate of: 55% on any excess taken as a lump sum and 25% on any excess taken as income.
After: Instead of the LTA limit there are now two new allowances
From April 2024, instead of a limit on the amount you can accrue tax-efficiently in your pensions, the new legislation means that only lump sums will be tested and potentially limited.
With this in mind, the allowances that you now need to account for are:
1. The Lump Sum Allowance (LSA) – this restricts the maximum tax-free lump sum that you can take from your pension savings to £268,275 (25% of the LTA as of March 2023)
2. The Lump Sum and Death Benefit Allowance (LSDBA) – set at £1,073,100 (the LTA as of March 2023), this incorporates the tax-free lump sums that you may take during your lifetime and the lump sums that can be paid in the event of death.
In each case, if you applied for one of the previous LTA protection options, your figure could be higher than the amount stated.
At the present 2023/24 Income Tax rates, based on the new regime, you should now only incur a maximum tax charge of 45%, which is lower than the sum you may have been charged under previous LTA rules.
Expats need to watch out for changes to QROPS
As well as the changes described above, there’s also a new overseas transfer amount for transfers to a Qualifying Recognised Overseas Pension Scheme (QROPS) from a UK Pension scheme.
This is the equivalent of the LSDBA of £1,073,100.
Any transfers that exceed the threshold will be subject to an “Overseas Transfer Allowance” of 25% on any amount above the LSDBA.
This will come in to force on 6 April 2024 – crucially, there’s still a window of opportunity to transfer your pension into a QROPS without triggering an additional tax charge.
If you’ve been thinking about the possibility of transferring your UK pension overseas and would like to understand more about how the Lifetime Allowance changes could affect your plans, please get in touch.
How the abolition of the Lifetime Allowance could affect your retirement plans
There are several ways the abolition of the LTA could affect your long-term financial plans.
You could resume pension contributions
Some people stopped contributing to their pension as they feared breaching the LTA. If this was something that gave you pause, it might be worth considering resuming payments. Doing so could mean you can continue to benefit from tax relief on your contributions, which could help you to boost your retirement income.
You might decide to “unretire”
Whether you already stopped work or were taking a phased approach to retirement, you might want to return to work or increase your hours and use your additional earnings to top up your pension pot. You’ll receive government tax relief on your contributions, and, depending on your circumstances, you may benefit from employer contributions, too.
Remember: if you’ve already started drawing flexibly from your pension, you may be subject to the Money Purchase Annual Allowance. This would mean that your Annual Allowance will be reduced from £60,000 to £10,000 (2023/24).
You could pass on more of your wealth
Since a pension is not normally considered part of your estate for Inheritance Tax (IHT) purposes in the UK, you may decide to preserve your pension for your beneficiaries.
If you have other assets you can use to generate the income you need, you could even continue to contribute to your pension, enjoy the tax relief, and reduce the value of your estate. This could help you to leave more of your wealth to your loved ones, or reduce any potential IHT charge.
Leaving your pension to beneficiaries can be complicated. So, if this is something you’re thinking of doing, please get in touch.
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.
Our advisers will give you first class advice specific to your needs and the country you live in.
Email enquiries@alexanderpeter.com or give us a call on +44 1689 493455.
Please note
This blog 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.
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.
The Financial Conduct Authority does not regulate estate planning.
