Lifetime Allowance (“LTA”) Changes
In the March 2021 Budget (2 years ago), Rishi Sunak (as Chancellor back then), announced that the LTA would be frozen at the level of £1,073,100 until April 2026. Two years later and ta da! As if by magic, the LTA has now been completely removed never to be seen again … for now.
As a pensions lawyer, the abolition of the LTA charge is as exciting as it gets! It’s up there with the likes of GMP equalisation, benefit specifications and other favourite areas of ours. One reason why it’s exciting to us pensions lawyers is because the government has announced that from 6 April 2023 the LTA charge will be “removed” but it will not be “fully abolished” until the 2024/25 tax year, until a future Finance Bill has been passed through Parliament. So more work needs to be done to pass a future Finance Bill through Parliament before it is completely abolished.
|Key Point Lifetime allowance charge removed from 6 April 2023 and to be abolished from 6 April 2024.
But the excitement doesn’t end there! The Labour Party has said it would reinstate the pensions LTA if it was elected. As the current Parliament first met on 17 December 2019, it will not be automatically dissolved on 17 December 2024. Technically, the Prime Minister can ask the King to dissolve Parliament earlier and force a general election (although it is rare for a monarch to intervene and exercise such a power). The next UK general election is scheduled to be held no later than 28 January 2025.
So just because today’s Government policy is for the LTA to be abolished, doesn’t mean to say it won’t ever come back again. This makes things challenging for pension savers who need long-term security and consistency when it comes to making lifetime pension arrangements. Short-term policy changes which could be reversed by successive Governments causes uncertainty and leaves savers in a precarious position.
LTA Charge Before 6 April 2023
The LTA is the total amount pension savers can build up over their lifetime under registered pension schemes without facing a tax charge when they come to take their benefits. Broadly speaking, before 6 April 2023 the LTA tax charge is 55% if benefits are taken as a lump sum or 25% if taken in any other way e.g. as pension payments or cash withdrawals. Therefore, removing the LTA results in significant tax savings for those with pension pots above the previous £1,073,100 level.
Impact of the LTA Changes on those with Statutory Fixed Protection
Members who applied for any valid enhanced or fixed protections before 15 March 2023, and received a certificate or reference number, will be able to from 6 April 2023:
- accrue new pension benefits;
- transfer to new pension arrangements; and/or
- join new arrangements,
without losing this protection. However, there are concerns around taking advantage of this given the Labour Party’s commitment to reinstate the LTA (if they were elected). We do not yet know whether they will change the way in which fixed protection works for those who accrue new pension benefits in excess of the LTA (be that retrospectively or going forwards).
In addition to the LTA changes, the maximum amount that a member can take as a pension commencement lump sum (“PCLS”) will be frozen at £268,275 (i.e. 25% of the £1,073,100 former lifetime allowance) across all the member’s registered pension schemes. However, members with a protected right to a higher PCLS will continue to be entitled to the higher PCLS. HMRC has confirmed that these members can accrue new pension benefits, join a new arrangement or transfer their pension without losing this protection. Although, this is not always straight forward as there are scenarios where adding further contributions will impinge on PCLS protection, for instance where the member made a successful late application (i.e. on or after 15 March 2023) for enhanced or fixed protection.
Members with a protected PCLS (higher than £268,275) will now be limited to the value of their pension pot on 5 April 2023. Any contributions made after that date will not be included in the calculation of their PCLS.
Other Headline Pension Changes
In addition to the removal of the LTA and freezing the PCLS at £268,275, other headline pension changes from the March 2023 Budget include:
- the pension annual allowance increasing from £40,000 to £60,000;
- the money purchase annual allowance increasing from £4,000 to £10,000;
- the minimum tapered annual allowance increasing from £4,000 to £10,000 and the adjusted income threshold increasing from £240,000 to £260,000; and
- the taxation of the LTA excess lump sum, serious ill-health lump sum, defined benefits lump sum death benefit, and uncrystallised funds lump sum death benefit: where they were formerly subject to a 55% tax charge above the LTA this has changed to taxation at an individual’s marginal rate.
|Key Point Annual allowance increasing from £40,000 to £60,000.
If you have any questions or concerns over how the March 2023 Budget pension changes might impact your pension, or if you are a trustee or sponsoring employer and would like more information about the changes, then please do not hesitate to contact a member of our team who would be happy to advise further.