The changes to pension allowances announced in the 2023 Spring Budget have presented estate planning opportunities for members of registered private pension schemes.
Most significantly, the government proposed to fully abolish the pensions lifetime allowance (“LTA”) from 6 April 2024 and the implementing legislation is now included in the Finance (No. 2) Act 2023. The LTA is the overall limit that a member can save as part of their pension during lifetime before a tax charge applies. In the interim period before 6 April 2024, a 0% tax rate will apply to pension savings that breach the pre-existing LTA and any excess will be taxed as income in the normal way. Previously such excess would have been taxed at 55% if paid as a lump sum. The Labour Party have indicated that they would reinstate the LTA and LTA charge if elected.
- Planning for retirement? Although the LTA charge has been removed, the remainder of the LTA framework remains in place for the 2023/ 2024 tax year. When benefits are crystallised this tax year, a member’s pension fund will be measured against the pre-existing LTA limit of £1,073,100. As such, it is vital for members to check whether their private and workplace pension schemes in total are near this limit and taking into account any “protection” from the LTA filed with HM Revenue & Customs. The pensions annual allowance has increased to £60,000 from 6 April 2023 and unused allowances from the previous three tax years can be brought forward. The amount that a member (excluding members with certain pension protections) can withdraw tax-free from their pension, however, is frozen at £268,275. Therefore, thought needs to be given to a suitable time to withdraw.
- Are you an additional rate taxpayer? From 6 April 2023, taxpayers with adjusted income over £360,000 per annum can claim a minimum tapered annual allowance of £10,000, with the same amount applicable to the money purchase annual allowance. Additional-rate taxpayers can claim tax relief of up to 45% on the amount of their pension contributions that fall within this annual allowance limit.
- Concerned about inheritance tax (“IHT”)? Normally, death benefits under registered private pensions fall outside the value of an estate for IHT purposes. Crucially, members can receive pension benefits during their lifetime without falling foul of the “reservation of benefit” rules which impose an IHT charge on death on assets that are not fully given away. Members may decide to bolster their pension pot and give away other assets during their lifetime to reduce the net value of their estate.
- Looking to benefit the next generation? Members can defer benefits without the LTA charge applying, giving their nominated beneficiaries a larger pension pot. Although beneficiaries will be subject to income tax at their marginal rate on receipt of distributions where the member dies on or after age 75, they will have had the benefit of the investment growth within the pension wrapper which would have rolled up largely tax-free.
Wedlake Bell’s Private Client team works closely with the firm’s Pensions team on estate planning affecting pensions. Please contact us for further information on these developments or on estate planning with pensions generally. This article provides a general update and specific advice should always be taken.