The Lifetime Allowance (LTA) charge was formally abolished on 6 April 2023. Previously, individuals faced a tax-free limit on their total pension savings at £1,073,1000. Anything above that could be taxed at 55% for withdrawals taken as a lump sum (or, 25% if taken as income).
Now that the LTA charge is gone, what does this mean for pension planning? Below, our Carlisle financial planners at Vesta explain the significance of this change to those in (and approaching) retirement. Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137
What was the Lifetime Allowance (LTA)?
The Lifetime Allowance (LTA) was introduced by the government in 2006. It was intended to balance some of the generous tax benefits offered by pensions – such as tax relief.
Over time, the LTA changed. For instance, in 2013-14 it stood at £1,500,000. By 2016-17 it had lowered considerably to £1,000,000. In the following years, it was raised gradually to account for changes to inflation – eventually standing at £1,073,1000 in 2020-21.
It stayed frozen at this level for the following tax years, until 2023-24. Now, with greater inflation pressures and senior NHS workers retiring early to avoid punitive taxes on their pensions, the Chancellor has decided to axe the LTA charge completely.
Other important pension changes
Not only has the LTA been abolished, but the maximum annual allowance an individual can access for pensions has also gone up by 50%. Now, the general rule is that you can put up to £60,000 into your scheme(s) each year – or, up to 100% of your earnings (whichever is lower).
The Money Purchase Annual Allowance (MPAA) has also been changed. Previously, if an individual triggered this rule (e.g. by accessing pension benefits), then their annual allowance would “shrink” to £4,000 per year. In 2023-24, however, this has been raised to £10,000.
Some initial thoughts on the pension changes
A big reason for the abolition of the LTA was to try and limit/reverse the haemorrhaging of GPs and other senior doctors from the NHS. Anecdotally, there are signs that this may be working.
However, it may not be enough to stop an exodus – particularly if more attractive employment opportunities can be found elsewhere in the world. One advert for a private hospital in Australia is offering Junior Doctors £130,000 per year and 20 days off a month!
The higher MPAA (to £10,000) will mean that savers who have already started accessing benefits under the “freedoms” can contribute more to their pension – without tax – than before. This could encourage more people to take a “blended” or “part-time” approach to retirement.
How does the Lifetime Allowance abolition affect me?
The LTA abolition arguably now makes pensions even more important for retirement planning and estate planning in 2023-24 and beyond.
For instance, pension “pots” (i.e. defined contribution pensions) can be handed down to beneficiaries without inheritance tax (IHT). They sit outside of your estate for IHT purposes, so could become more effective at passing down wealth to the next generation.
An individual’s pension contributions also receive tax relief equivalent to his/her highest marginal rate of income tax. A higher rate taxpayer, for example, gets 40% tax relief – so it only “costs” him 60p to put £1 into his pension.
Now that the maximum annual allowance has been raised to £60,000 per year, those with earnings at/near this level could increase their pension contributions whilst still receiving tax relief.
If so, then this could boost the eventual size of their pension pots – which no longer face a “tax-free” limit now that the LTA charge is gone. This could allow some people to make higher pension withdrawals in retirement, boosting the quality of their lifestyle.
However, despite these advantageous changes, it is still difficult to do long-term planning with the LTA in mind. This is because the rules may still change in the future.
The Labour Party has stated that it will reverse the Chancellor’s decision to abolish the LTA (with some special rules for NHS workers) if it wins the next general election.
Given that the increase in the maximum annual allowance to £60,000 also, arguably, mostly benefits those on higher incomes, it is conceivable that this could also change under a new future UK government.
Consider seeking professional financial advice if you want to explore your options with the LTA. One possibility is that some people could retire earlier than planned if, say, Labour wins in the next general election on a manifesto pledge to re-introduce the LTA.
Also, bear in mind that pensions do not come without tax implications in estate planning. In particular, if you die after age 75, then any withdrawals from your pension(s) made by beneficiaries will come under their income tax bill.
Income tax is also due at your marginal rate on any excess over your LTA, if taken as a lump sum. In 2023-24, the most you can take from your pension as a tax-free lump sum is either:
- 25% of the capital value of your pension, or
- 25% of £1,073,100.
Alternatively, if you have lifetime allowance protection, then you can take a lump sum of up to 25% of the protected value.
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.