The Lifetime Allowance (LTA) is a limit on how much you can build up in pension benefits without paying tax. It’s currently set at £1,073,100 and benefits above this were subject to a tax charge. To the surprise of many, it was announced in the 2023 Spring Budget that the LTA would be scrapped in its entirety. In the short term, the LTA charge was reduced to zero and from the 6th of April 24, it will cease to exist entirely.
It’s been replaced by two brand new allowances which limit the amount that can be paid as tax-free lump sums. These allowances are called the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance.
Despite these seemingly significant changes, in reality, very little has changed. For the majority, no changes will be required to how your pensions are currently managed.
What are these allowances?
Lump Sum Allowance: £268,275
The Lum Sum Allowance (LSA) will set the amount that can be taken as tax-free lump sums during your lifetime. The total amount you will be able to receive tax-free from your pension will not change. It will be £268,275 (as it is currently) but will now be a fixed figure rather than being 25% of the LTA.
For those who haven’t previously taken pension benefits, your LSA will be set at £268,275 on the 6th of April 2024. If you’ve previously taken pension benefits, your LSA will be reduced by 25% of the LTA that you’ve previously used.
When taking money from your pension, the existing arrangement remains unchanged, 25% can be taken as a tax-free lump sum with the remainder subject to income tax.
From the 6th of April, each time you receive a tax-free lump sum, it will be deducted from your Lump Sum Allowance.
Transitional Certificate:
For those who’ve taken pension benefits before April 2024, the LSA calculation assumes that 25% of the LTA previously used was received as a tax-free lump sum. This isn’t always the case, in particular, those who receive a Defined Benefit (DB) pension. Someone with an NHS DB may have opted against receiving a tax-free lump sum in favour of a higher income amount. Despite this, the LSA will be reduced even though no tax-free lump sum was received.
The LSA is a limit on tax-free lump sums received and therefore in such cases as above, a Transitional Certificate can be requested. This will confirm that 25% wasn’t received as a tax-free lump sum and the LSA will be increased to reflect this.
Lump Sum and Death Benefit Allowance: £1,073,100
The Lum Sum and Death Benefit Allowance (LSDBA) will set the amount that can be paid from a pension as a tax-free lump sum on death to the beneficiaries of the pension should death occur before age 75. The LSDBA has been set at the current LTA of £1,073,100.
For those who haven’t previously taken pension benefits, your LSDBA will be set at £1,073,100 on the 6th of April 2024. If you’ve previously taken pension benefits, your LSDBA will be reduced by 25% of the LTA that you’ve previously used.
From the 6th of April, each time you receive a tax-free lump sum, it will be deducted from your LSDBA. Any lump sum paid on death above the allowance will be subject to income tax on the beneficiary at their marginal tax rate.
It’s important to note that this allowance only applies to benefits paid as a lump sum. If death occurs before age 75, an unlimited amount can now be passed to beneficiaries as a drawdown pension. Once in a drawdown pension, beneficiaries can decide to take the full amount as a tax-free lump sum should they wish.
What hasn’t changed?
Protection:
For those with protection, these will continue to be in place. For example, if you have protection of £1.8 million, you will have an LSA of £450,000 and an LSDBA of £1,800,000.
Taxation of pensions if death after age 75:
There is no change to the taxation of pensions if death occurs after age 75. If the pension is passed to beneficiaries as a lump sum or through drawdown, it will be taxed at the beneficiary’s marginal rate.
In Summary
We understand that pensions are very complex, and these changes are likely to cause some confusion. They don’t impact the majority!
Please be reassured that in most cases, no changes will be required to how your pensions are currently managed.
However, we will be reviewing all client’s circumstances on a case-by-case basis and will be in contact if we believe changes should be made.
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