21 February 2024
Since 2006, pension savings have been subject to a Lifetime Allowance (LTA), which places a limit on the overall value you can build up across all your pensions before having to pay additional tax. For the 2022/23 tax year, the LTA stood at £1,073,000.
In March 2023, the Government announced that it would be removing the LTA tax charge with effect from 6 April 2023, and abolishing the LTA altogether from 6 April 2024. These moves have been taken to encourage high earners to remain in employment, rather than retire early to avoid a hefty tax penalty.
What does this mean for you?
Most people won’t be affected by the LTA, but if you are, the changes are good news: you can now save more for your retirement without incurring a tax charge. There will, however, still be a limit on the amount of money you can take as a tax-free lump sum at retirement.
Prior to the changes, you could take up to 25% of your pension savings as a tax-free lump sum, with the remainder taxed as income. The new arrangements introduce a Lump Sum Allowance (LSA), which has been set at 25% of the value of the LTA at the time of its removal – i.e. £268,275. This is the maximum lump sum you can receive from all your pension savings. If you exceed this limit, the amount over the limit will generally be taxed as income. Members with existing LTA protection may have a higher limit before they are liable to pay the additional tax.
There will also be a new Lump Sum and Death Benefit Allowance (LSDBA), set at £1,073,000. This limits the payments that can be made tax-free following someone’s death or in circumstances where, due to ill health, someone’s entire pension is converted to a single cash sum. This limit will be reduced if the person has previously taken tax-free cash sums at retirement (i.e. those covered by the LSA above).
At the time of writing, the abolition of the LTA and the introduction of the new allowances are yet to be confirmed in legislation. We will provide a further update when these new measures have become law. Please note that: The Labour Party have stated if they win the next general election, they plan to reverse the current Government’s decision and reinstate the LTA.
As ever, we recommend that you take independent financial advice if you think you may be affected by any of the issues in this article.