How the abolition of the Lifetime Allowance could affect your retirement plan

Category: News

The retirement landscape is changing, with many people living longer and multiple changes to pension rules announced in the 2023 Spring Budget.

One of the biggest announcements was the removal of the Lifetime Allowance (LTA) charge from 6 April 2023, with plans for the complete abolition of the LTA from 6 April 2024.

Previously, the LTA limited the total amount you could build up in pension benefits without incurring an additional tax charge when you came to draw on them. So, its removal may be welcome news to many savers.

However, according to research published by Professional Adviser, these LTA changes have led to a rise in demand for retirement advice as people struggle to get to grips with the new rules.

Read on to find out more about the LTA, how it’s changing and what this could mean for your retirement plans.

The Lifetime Allowance previously placed a limit on total tax-efficient savings

Before 6 April 2023, if you accrued more than £1,073,100 in pension benefits, you might have paid an LTA charge on the excess, depending on how you drew it. This was a 55% charge on lump sums, or a 25% charge on income on top of your marginal rate of Income Tax.

The LTA was a savings barrier for some. Indeed, research published by Professional Adviser has revealed that 16% of people said they stopped paying pension contributions because they were approaching the LTA.

How the Lifetime Allowance is changing

Some of the announced LTA changes have already taken effect, and others will come into force on 6 April 2024. Find out more about these changes below.

Removal of the Lifetime Allowance charge and abolition of the threshold

The LTA charge was removed on 6 April 2023. So, any withdrawals in excess of the LTA since this point may have incurred your marginal rate of Income Tax rather than an LTA charge. The LTA will then be fully abolished on 6 April 2024.

While the abolition of the LTA may make pensions more attractive for higher earners as a tax-efficient way to save, remember that you’ll only enjoy tax relief within your Annual Allowance.

The Annual Allowance is the maximum amount you can contribute to your pension in a single tax year without facing an additional tax charge. For the 2023/24 tax year it stands at £60,000 or 100% of your earnings, whichever is lower.

However, your Annual Allowance may be lower if your income exceeds certain thresholds, or you have already flexibly accessed your pension.

So, the abolition of the LTA could mean you can potentially build up a bigger pension pot without facing an additional tax charge on withdrawal. However, you’d be wise to monitor your annual contributions and make withdrawals carefully to avoid paying more tax than you need to.

3 new allowances will replace the Lifetime Allowance

There are two main allowances replacing the LTA from 6 April 2024:

  • Lump Sum Allowance (LSA) – This will be £268,275 for the 2024/25 tax year. It applies to tax-free benefits taken as a pension commencement lump sum or as part of an uncrystallised funds (savings you haven’t yet accessed) pension lump sum. Any amount of these sums that exceed the LSA will be taxed at your marginal rate.
  • Lump Sum and Death Benefits Allowance (LSDBA) – This will be £1,073,100 for the 2024/25 tax year. It is the overall limit on tax-free lump sums and the tax-free element of other lump sums paid during your lifetime and on death.

There’s also:

  • Overseas Transfer Allowance (OTA) – This will be £1,073,100 for the 2024/25 tax year. It essentially replaces the LTA for any transfers you make to overseas pension schemes. A 25% charge is applied to any amount that exceeds the OTA.

However, if you’ve already drawn benefits in excess of the LTA, you will not benefit from any of the new allowances.

Furthermore, if you’ve used some but not all of your LTA, your new allowances will be reduced in line with the amount of LTA you have already used. This will be calculated by subtracting 25% of your previously used LTA from the LSA or LSDBA.

Such calculations can be complicated and with the new allowances yet to be implemented, it’s not clear exactly how they will work. And yet, they could have a significant impact on how much of your pension you can take tax-efficiently.

So, it may be wise to speak to a financial planner who can help you navigate the new rules and factor them into your retirement plans.

What the Lifetime Allowance changes could mean for your retirement plan

The abolition of the LTA could affect your retirement plan in several ways.

You might decide to resume pension contributions

If you stopped making contributions to your pension previously because you were nearing or already in excess of the LTA, you might want to consider resuming payments to continue benefiting from the tax relief available.

This could help you grow your pension pot further and boost your retirement income.

You might choose to return to work or delay retiring

To benefit from government tax relief on your contributions, and continue receiving employer contributions, you might choose to “unretire” or delay retiring.

Bear in mind that, if you’ve already started drawing flexibly from your pension, you might have triggered the Money Purchase Annual Allowance, which reduces your Annual Allowance to £10,000 (2023/24).

You could use your pension to pass on wealth tax-efficiently

A pension isn’t usually considered part of your estate for Inheritance Tax purposes. So, you might choose to put more into your pension or delay drawing on it so that you can pass on more of your wealth to loved ones.

You’ll still be bound by your Annual Allowance, and your beneficiaries may pay Income Tax if you die after the age of 75. However, your savings will have had years to grow before this time.

Additionally, when making adjustments to your retirement plan, you’ll need to be mindful of the new allowances that will replace the LTA and this will require careful tax planning.

As the new rules haven’t come into force yet, it may be difficult to understand how they’ll work and how they could affect you. A financial planner can help you get to grips with these complexities and support you to create a plan for maximising the tax efficiency of your retirement savings.

Get in touch

If you’d like to learn more about the changes to the Lifetime Allowance and how these could affect your retirement plans, please contact us by email at info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.