Lifetime Allowance, what do the changes mean for you?

As you can imagine, the team have been inundated with queries over the last week with what these changes mean for them, so I decided to write an article on some of the key points. Chancellor Jeremy Hunt made some sigificant changes to Lifetime Allowance tax last week and, as you can imagine, this has raised significant queries, please see key questions below.

What are the changes?

On the 15th March 2023 Jeremy Hunt announced the most dramatic changes to pension tax in over 10 years.?These changes take effect from the 6th of April 2023 and include; the abolition of the Lifetime Allowance (LTA) charge, and the raising of the general Annual Allowance (AA) to ￡60,000. As well as tweaks, so that most people will have an AA of at least ￡10,000. Whilst the industry expected a small change, nobody expected changes of this magnitude.

Since its introduction in 2006, the Lifetime Allowance Tax has been very complex and has changed regularly; most recently it was set at ￡1,073,100. The LTA sets a ceiling for your pension pot, above which you must pay extra tax generally when you withdraw it-or when you reach age 75. This ceiling includes both what you pay in to your pension and investment returns that increase your pensions value. Currently, that penalty rate is up to 55% for lump sum withdrawals and 25% if you take the excess as income.

What does this mean for clients?

If your pension is close to, or over the Lifetime Allowance limit, I would suggest reaching out to the team or your Hoxton adviser to discuss the direct impacts. However broadly speaking, Hunt’s changes mean these LTA tax charges will no longer be applicable from 6 April 2023. While the actual removal of the LTA entirely needs to pass through Parliament, it will still continue to exist without any tax charge. The government is aiming for the LTA to be entirely abolished as of 6 April 2024. The impact on pension savers will be almost immediate and, as from the 2023/24 tax year there will be no LTA charge, regardless of the size of your pension.

Does this mean I can get a larger lump sum? (PCLS)

Unfortunately, no. Currently the lump sum is restricted to the current LTA protection you hold, or 25% of the ￡1,073,100. The removal of the LTA will not remove this limit on tax-free lump-sum withdrawals. As of the 2023/24 tax year, the maximum Pension Commencement Lump Sum (PCLS) will be retained at ￡268,275 (i.e. 25% of the LTA) and will be frozen thereafter. Except for people who have a right to either a higher lifetime allowance or have pension commencement lump sum protection. For example, Fixed Protection 2016 secures your LTA at ￡1.25m when it was reduced previously. Although the applications in terms of LTA protection are now limited to either Individual or Fixed Protection 2016, they could offer a greater PCLS than is currently available (25% of ￡1.25m in this example).

Can this help with leaving wealth to my family free of IHT?

The short answer is yes, however it is a great deal more complicated, and again I would recommend seeking advice. Essentially the chancellor has created an unlimited IHT shelter by abolishing the pensions lifetime allowance limit.

Currently if anyone dies pre-75 their pension can be passed to their beneficiaries tax-free if it is within their lifetime allowance limit. As of the 6th April, that Lifetime Allowance limit is no more. There are marginal income tax considerations for beneficiaries which are determined by the age the pension owner passes away, but if managed correctly these Lifetime Allowance changes can be of huge values for those who wish to pass on wealth.

In summary, these changes are some of the most positive changes to UK pensions in over 10 years, and I would highly recommend reaching out to the team to discuss how to ensure you are maximising the opportunities these changes create.?

One thing to be conscious of and some may call me a pessimist, but given the government’s consistency to change Lifetime Allowance Tax, my advice would be to act quick to not miss out on any oppurtunities.