Government confirms the abolition of the lifetime allowance

The Autumn statement confirmed the abolition of the LTA with effect from 6 April 2024.

The removal of the LTA is complicated by the limits on tax-free cash and other tax-free lump sum payments, such as death benefits for those who die under the age of 75. There was some doubt as to whether a working solution could be implemented in time, but the Autumn statement confirmed the abolition will take place from 6 April 2024.   

As well as confirming the abolition date, HMRC also published an updated policy paper which addresses some of the concerns raised by the industry during the LTA working group meetings.  

There are still a few other key aspects that need to be clarified and the legislation published in the Autumn Finance Bill should provide that, however, these are some of the key points. 

Limits on tax-free lump sums 

There will be two limits on pension payments that can be made free of tax:

• A lump sums and lump sum death benefits allowance of £1,073,100. 
• A tax-free cash limit, known as a lump sum allowance, of £268,275. This will count towards the overall limit above and will include the tax-free element of uncrystallised funds pension lump sums.

 
Anything paid as a lump sum above these limits will be subject to either the member’s or beneficiary’s marginal rates of income tax. 

Anything paid as pension income will not be tested and will be subject to income tax in the normal way. 

Those with LTA protections will have both higher tax-free cash limits and higher lump sum and lump sum death benefit limits. 

The updated policy paper confirmed that payments made under the trivial commutation, small pots or winding up lump sum rules will not count towards the lump sum limits. This is a welcome simplification, for both members and providers, over the proposed rules that were previously announced. 

Death benefits paid as income 

Whilst lump sum death benefits in excess of the lifetime limit will be subject to income tax, the updated policy paper confirmed that death benefits paid as drawdown or as an annuity will continue to be tax free. The initial policy paper, issued in July 2023, suggested that the full value of benefits paid in this way may be taxable, so this is a very welcome clarification for pensions savers.  

Valuations

The valuation of previous benefits has been one of the most difficult areas for HMRC to get right under the new regime and has been the focus of the LTA working group discussions.

However, one key point is that the updated policy paper states that those with complete and accurate records of their previous tax-free cash amounts will be able to supply this to their pension scheme for an alternative calculation is this gives them a better outcome than the standard rules allow. 

We believe this may allow those who didn’t previously take their full tax-free cash entitlement to be able to make use of this when they take future benefits. This will primarily be those who have taken their defined benefit pensions without the maximum tax-free cash entitlement, because of either restrictions in the scheme rules or unattractive commutation factors. 

As example may help demonstrate this.  

A member took their defined benefit pension of £25,000 a year in June 2017 when the LTA was £1m. They took no tax-free cash. This will have used up 50% of the LTA, i.e. £25,000 x 20/£1m.

Under the current rules, they would now be restricted to tax-free cash of 25% of 50% of the LTA. The change may allow them to take the full £268,275, providing they still have uncrystallised funds of £1,073,100 or more.

With only four months until the new tax year, it will be challenging for schemes to implement the changes to take effect from 6 April 2024 and for members to be able to fully understand the implications of them. However, the changes announced in the policy paper are generally welcomed.    

Complexity remains with the introduction of the new replacement allowances and for those who have transitional protection and pension savers with significant pension pots should still seek advice before accessing their pensions.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The Financial Conduct Authority (FCA) does not regulate tax advice. 

This information is correct as at 14/12/23

Source: https://www.ftadviser.com/pensions/2023/11/22/govt-confirms-lifetime-allowance-abolished-from-april/#:~:text=The%20government%20has%20confirmed%20the,needs%20more%20time%20to%20prepare.