Spring Budget 2024 - Pension Tax is Changing
Discover pension tax, lifetime allowance (LTA) removal, and the introduction of new regulatory limits affecting pension savers.
Some 18 years ago in 2006, it became Government policy to put a limit on the size of a pension fund an individual could accrue before potentially incurring taxable penalties.
This pension fund size limit is known as the pension lifetime allowance (often referred to as the LTA). Historically it has been as high as £1.8million, and latterly it has been much lower at a figure of £1,073,100.
I use the word ‘lower’ advisedly, as to many people a tax-free pension savings ceiling of just over a million pounds will seem enormous and something that only affects the extremely well-off individuals. However, this is extremely misleading as there are many people who have a past pension service in what is known as final salary or defined-benefit schemes, where the funds for a pension accrued over 20 years on salaries of only £35-40k would actually use up a lot of this allowance, particularly when combined with workplace pensions funds that will have been saved by retirement.
So, the current Governmental move to remove the LTA entirely from April this year will seem to be good news for many pension savers who meet the above criteria.
Well, the answer as always with Governmental tax legislation is more complicated than the headline suggests. The LTA may go, but it is being replaced with two new regulatory limits or allowances and these are:
- The lump sum allowance (LSA)
- The lump sum and death benefit allowance (LSDBA)
Fundamentally the introduction of these new allowances will mean people can take as much taxable pension income as they want without it being tested against the LTA and not subject to an additional tax charge. However, these two new allowances are designed to control the level of tax-free lump sums that can be taken from the pension fund both in retirement and for any recipient beneficiaries following the death of a member.
The lump sum allowance is currently set at £268,275 (25% of last LTA £1,073.100) measures the tax-free lump sum taken whilst living as pension commencement lump sums and the tax-free part of any uncrystallised pension fund tax-free lump sums. This outcome could be different if the individual has previously arranged any sort of LTA pension protection.
The lump sum and death benefit allowance which is usually set at £1,073,100 measures the tax-free lump sums used by the LSA, plus any benefits paid out a serious ill-health lump sum and any tax-free lump sums paid out on death to the beneficiaries.
Whereas historically, the Government has sought to control pension fund size by applying a taxation threshold. This new regime recognises the benefit of increased taxable income to both the individual and to Government fiscal receipts whilst taking a prudent approach to the amount of tax-free cash that can be utilized outside of retirement planning.
There will of course be individuals who have already taken some benefits and may have more to crystallise in the future (both as lump sum and income). Therefore, the Government have introduced transitional rules to accommodate these circumstances. Broadly, the future allowances (for both the LSA & LSDBA) under the new legislation will be reduced to reflect previous lump sums taken and it will be this reduced limit that will be used for testing when the next occasion arises for benefits to be taken after 6th April 2024.
Clearly what limit is applicable will be down to individual circumstances and whether such tools like pension protection have been utilised. Therefore, if you are affected by these changes, it will certainly pay to seek financial guidance to ensure you remain within regulated allowances and that your tax-free cash is maximised.
The key messages to take away from this article is that even moderate earners not just high earners may be impacted by these changed allowances and that with something as important as your retirement future, independent financial advice has never been more important.
Editor’s notes:
March 2024
The information within this article is based on Acumen Employee Benefits' (part of The Financial Planning Group's) understanding of current legislation, which is subject to change, and should not be regarded as advice or recommendation. Readers should seek appropriate guidance from their employee benefits consultant.
