Pension Lifetime Allowance Budget Changes
One of the more eye-catching announcements in the Chancellor’s recent budget was the abolition of the pension Lifetime Allowance (LTA). An increase in the allowance had been expected (from £1.073m to £1.8m), but the complete removal of it was an unexpectedly generous move.
The Lifetime Allowance is a limit on the total tax relievable pension benefits that an individual can accrue over their lifetime. More information is covered in this blog here.
If you want a broader recap of what exactly a pension is, please click here.
The proximate reason for the chancellor doing this is to stop senior NHS consultants and surgeons from retiring, or reducing hours, as they decide work is no longer worth it due to additional tax on their pensions. Towards this end the Chancellor also increase the amount of tax-relievable pension benefits you can accrue each year – see pension funding section below.
On the face of it, this seems quite an expensive (for the Treasury) hammer to crack the NHS pensions nut, but it does bring some welcome planning opportunities for those with large pensions benefits.
Retirement Planning
Most of us will need to save for the future to become financially independent of our work and to be able to afford the lifestyle spending we desire in retirement.
Pensions are typically one of the most tax efficient ways of saving and extracting profit from a business. The removal of the Lifetime Allowance will greatly increase the scope of using pensions as part of this planning.
The general premise of the pension tax system is that contributions are tax free, allowing them to be made out of gross income (corporation tax deductible, no BIK for employer contributions, tax relievable for personal ones), pensions can then grow free of taxes before pension withdrawals are subject to tax as income (but with a current 25% tax-free allowance*).
* The maximum tax-free lump sum entitlement has not been removed, this remains 25% of the outgoing Lifetime Allowance, equal to £268,275 (certain protections may give higher personal entitlements).
Estate Planning
Pensions can also be extremely effective vehicles for estate planning because they are generally free of Inheritance Tax (IHT)*. You may have seen comments in the press that an unintended consequence of the Lifetime Allowance being removed is the facilitation of wealthy individuals leaving huge pension pots outside of IHT, costing the Treasury further.
Indeed since 2015 when pension death benefits were overhauled, we shifted most of our retired clients to preserving their pensions and consuming other investments instead, reducing IHT liabilities in doing so. Up until now the Lifetime Allowance had to be considered (for those under age 75 at least); with it removed the scope for utilising pensions in estate planning will be greatly increased.
In the event of death before age 75, pension death benefits can be paid as 100% tax free sums* (both income tax and IHT). This means tax relief was enjoyed on the way in, never recovered on withdrawal and IHT avoided. There is also the possibility of paying sums into trust, keeping them outside of anybody’s estate for IHT.
Benefits on death post age 75 aren’t quite as generous, with amounts drawn subject to income tax at the recipient’s marginal rate, but they are still free of IHT. Pensions can be left to beneficiaries completely intact, to help fund their retirements.
* On death benefits paid within 2 years of death.
Pension Funding / Annual Allowance
The maximum amount of tax relievable pension benefits accruable each year is limited by the Annual Allowance. The recent budget increased this from £40,000 to £60,000 (from 6th April 2023).
There is an ‘adjusted’ income limit*, above which you start to gradually lose your Annual Allowance (by £1 for every £2 total income exceeds the limit). This was increased for 2023/24 from £240k to £260k. The minimum reduced (or ‘tapered’) Annual Allowance you can be left with was also increased from £4k to £10k.
Welcomely, another limit on pension contributions, for those who have already ‘flexibly’ accessed their pension benefits was also increased from £4k to £10k.
* This is complicated and includes all taxable income, not just earnings and also requires you to add in most employer pension contributions. You should seek professional advice if you have a high income and are contributing to a pension.
Concluding Notes
As ever with pensions legislation we don’t know what the future will bring. In particular with these changes, we know that Labour have publicly opposed them and there is a good chance they will be in power come the next general election.
It’s also worth noting that the Lifetime Allowance won’t actually be abolished until April 2024, as complex pensions legislation is gradually unpicked. For the 2023/24 tax year, HMRC will simply be waiving LTA tax charges.
Many people with large pension benefits will have ‘transitional protection’ arrangements in place from the historic reductions in the Lifetime Allowance (2006, 2012, 2014 and 2016). Many of these would be lost on making a new contribution. This is obviously not a problem if the Lifetime Allowance is gone for good, but the possibility of changes from a new Labour government may want to be considered before rushing into action.
This complex (and important) area of legislation and the various permutations involved is something we will be covering with each of our clients with large pension benefits. If you would like help with your pension planning, please feel free to contact us via the button below.
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Disclaimer:
The above is provided for general information only. No action should be taken without seeking advice for your specific circumstances. Collingbourne Wealth Management Ltd does not provide tax advice. All information is based on our understanding of current tax rules as at the time of writing, which is subject to change.
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