What the end of the Lifetime Allowance means for pension savers
The end of the Lifetime Allowance for pension savers announced in the Spring Budget is likely to have surprised many, especially as it was due to remain at the current rate until the end of the 2023/2024 tax year.
We received many questions from clients after the announcement, and following a detailed review of the legislation, we believe that it provides some excellent opportunities for tax-efficient saving.
In this blog post, we will introduce the Lifetime Allowance, and share some steps that those who have already crystallised their pensions, are currently making contributions, or have stopped making contributions, may like to consider taking. We will also share a few other ways you can take control of your pension.
Please note: many of the ideas in this blog post involve an element of investing. As is the nature with investing, your capital is at risk, and you may not receive back the same amount you put in when you choose to cash out your savings. In addition, the ideas set out in this blog post are based on our current understanding of UK legislation, impacting only those within the UK tax system.
What is the Lifetime Allowance?
The Lifetime Allowance (LTA) is a cap on the total amount a UK resident can save into their pension before incurring an additional tax charge. Here are the key points to be aware of regarding the LTA:
- The LTA was introduced in April 2006 at £1,500,000 and was due to remain at £1,073,100 before the Spring Budget announcement.
- A tax charge of 55% was applied if benefits were taken as a lump or 25% if funds were withdrawn to provide income (e.g., via annuity purchase or flexible access drawdown).
- The maximum amount of money available ‘tax-free’ when a person takes benefits from their pension, also known as the Pension Commencement Lump Sum, is currently £268,275 (25% of the previous LTA of £1,073,100).
- The reduction of the LTA over the years has been accompanied by a series of ‘protections’ designed to allow some pension savers to keep a higher personal LTA. Under the new legislation, you will still be entitled to this larger PCLS (provided your protection remains in place).
While the PCLS and LTA protection remain unchanged, the LTA tax charge (at 55% and 25%) was reduced to 0% on 5th April 2023 and is scheduled to be removed from legislation on 5th April 2024, following a passing of the Finance Bill. Once this change has been made, there will be no limit to the amount you can save into a pension.
How will the end of the Lifetime Allowance impact pension savers?
For many pension savers, the end of the Lifetime Allowance is good news. With no limit to the amount that can be saved into a pension under the current scheme before incurring a significant tax charge, this allows savers to benefit from additional tax relief and provides another route for the mitigation of Inheritance Tax. However, others may feel disadvantaged by this change, especially if they had paused contributions into their pension to mitigate the LTA tax charge. We have identified the three main types of pension savers this change is likely to impact and outlined some steps they may wish to consider taking below.
If you have stopped making contributions
If you have stopped making contributions into your pension because your savings were approaching the LTA threshold or wanted to free up some cash to cover other expenses, now is the time to review your savings strategy. You may also have the opportunity to take advantage of unused contribution allowances from the previous three tax years to increase pension savings, provided you meet specific criteria. We would suggest this is especially important for anyone approaching the age of 75 who would like to benefit from tax-efficient savings for retirement. Those who have adjusted their investment strategy to minimise the potential for growth to avoid passing the LTA threshold should also reconsider their approach to make the most of their money.
If you have already crystallised your pension
If you have already started to take income from your pension or if you have been making smaller contributions to mitigate the LTA tax charge, you may also wish to reconsider your financial arrangements. The good news is that even if you have crystallised your pension, you can continue to contribute into your pension and benefit from saving in a tax-efficient way until the age of 75. In addition, the recent increase of the Annual Allowance means you can save a further £20,000 per year tax-free than you could in the 2022/2023 tax year.
If you are currently making pension contributions
Broadly speaking, unless you are over the age of 75 or have already crystallised your pension, we would recommend incorporating pension savings into your financial arrangements. Not only does this enable you to grow your tax-free savings, but it also helps to mitigate Inheritance Tax. The end of the LTA offers further incentive to contribute into a pension, with no limit to the amount that can be saved tax-free once the charge has been removed. You may also wish to take advantage of the opportunity to potentially grow your savings further by investing savings instead of holding them in cash.
More options for taking control of your pension
While a pension offers many benefits, it is worth noting that the funds you contribute are often invested on your behalf, which means you may not have control over which companies you invest in. Savers who would prefer to manage their investments more closely and take advantage of the potential to see greater returns on the funds they are saving, may wish to consider a Self-Invested Personal Pension. Another option for taking control of your pension is to ensure that all your pension funds are consolidated into one pot to make it easier to manage and monitor your finances.
Discussing how the Lifetime Allowance impacts you
In this blog post, we have outlined several benefits offered by the end of the Lifetime Allowance and some steps that three types of pension savers may wish to consider taking. However, we have only provided general guidance, and the actual impact on your financial arrangements will vary based on individual circumstances. It is also important to note that this legislation could change as a result of the next Government elected and each saver should consider this risk carefully. We recommend speaking to a Wealth or Financial Planner to fully understand the implications for your finances before making any decisions.
While the end of the Lifetime Allowance offers some compelling opportunities for tax-efficient saving*, our Wealth Planning Service may also be able to help identify further opportunities to make the most of your money**. We also offer an integrated Wealth Management service across planning and investing, as we believe working with a Wealth or Financial Planner is the most effective way to make your finances go further.
For personalised advice on how to structure your finances and pension efficiently, speak to an Adviser.
* Please note, the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
** As is the nature with all investing, your capital is at risk and you may not receive back the same amount you put in when you choose to cash out your savings.