Lifetime Allowance, what do the changes mean for you?
Partner, Kareem Rathore, gives his opinion on the recent budget and what the changes on Lifetime Allowance mean for you.
“As you can imagine, the team has received many inquiries in the past week regarding the implications of these modifications. Chancellor Jeremy Hunt recently implemented significant changes to the Lifetime Allowance tax, resulting in many questions. Please refer to the essential questions below.
What are the changes?
On the 16th of March 2023, Jeremy Hunt announced the most dramatic changes to pension tax in over ten 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.
The Lifetime Allowance Tax has been highly intricate and subject to frequent revisions since its introduction in 2006. The most recent iteration set the limit at £1,073,100. The LTA establishes an upper limit for your pension pot, beyond which you must typically pay additional taxes when withdrawing funds or reaching age 75. This limit encompasses your contributions to the pension and the investment returns that raise its worth. Currently, the penalty rate for surpassing the LTA is up to 55% for lump-sum withdrawals and 25% for excess income withdrawals.
What does this mean for clients?
If your pension nears or exceeds the Lifetime Allowance threshold, I recommend contacting the team or your Hoxton adviser to discuss the direct consequences. However, in general, the changes proposed by Hunt imply that the tax charges associated with the Lifetime Allowance will no longer apply to start from April 6, 2023.
While the complete abolition of the LTA still requires parliamentary approval, it will still exist without any tax charges. The government’s objective is to eliminate the LTA by April 6, 2024, completely. The impact on pension savers will be almost immediate, and starting from the tax year 2023/24, there will be no LTA charges, regardless of the size of your pension.
Does this mean I can get a larger lump sum? (PCLS)
Unfortunately, removing the Lifetime Allowance (LTA) will not remove the limit on tax-free lump-sum withdrawals. Currently, the lump sum is restricted to the LTA protection you hold or 25% of £1,073,100. As of the 2023/24 tax year, the maximum Pension Commencement Lump Sum (PCLS) will be fixed at £268,275, 25% of the LTA.
This amount will remain frozen except for individuals with a right to a higher lifetime allowance or PCLS protection. For instance, Fixed Protection 2016 secures your LTA at £1.25m when previously reduced. Although LTA protection is now limited to either Individual or Fixed Protection 2016, they could offer a higher PCLS than the current maximum (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, the situation is considerably more complex. I would suggest seeking advice for more information. In essence, the Chancellor has created an unlimited Inheritance Tax (IHT) shelter by eliminating the lifetime allowance limit on pensions.
Currently, if an individual dies before age 75, their pension can be passed to their beneficiaries without any tax if it is within the lifetime allowance limit. However, from April 6th, this lifetime allowance limit will no longer exist. Some minor income tax considerations for beneficiaries depend on the pension owner’s age at the time of their passing. However, with proper management, these changes to the lifetime allowance can be highly beneficial for those who want to pass on their wealth.
Summary
In summary, these changes are some of the most beneficial adjustments to UK pensions in a decade. I strongly advise contacting the team to explore how to take advantage of the opportunities created by these changes. It’s essential to know that the government has a track record of altering Lifetime Allowance Tax. While I don’t want to be negative, I recommend acting promptly to avoid missing out on any potential benefits.”
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