Abolition of the pensions Lifetime Allowance (LTA)

Abolition of the pensions Lifetime Allowance (LTA)

The LTA has, in recent years, been frozen at £1,073,100. It 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 2023/24 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 2023/24.

• Suppose it is now estimated that Asif’s pension fund will be worth about £1.2m when he retires.
• 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 LTA limit.
• Prior to 2023/24, 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.
• The additional funds mean that she can retire immediately, enjoying a higher level of pension income than she had previously anticipated. If there is a change in Government, 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

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