The future of pension planning has recently become a little clearer with the publication of a policy paper on the abolition of the Lifetime Allowance (LTA) and draft rules for 2024/25 onwards. In simple terms, the Lifetime Allowance was previously used as the limit that you could build your pension pot up to without incurring a tax charge. The LTA was retained for the current tax year with the charge for exceeding it set to zero.
With the draft rules having been announced to come into effect from April 2024, find out more about how the allowance will change and what it means for you…
What’s changing from April 2024?
From next April the government have instructed HMRC for the Lifetime Allowance (LTA) to be completely removed, but a cap is to be maintained to limit what can be taken free of tax. This has led to the introduction of two new allowances that will be tested when drawing benefits or on death:
- Lump Sum Allowance (LSA)
This is the allowance for the maximum that can be drawn as a tax-free lump sum. The allowance has been set at £268,275 (25% of the previous LTA limit) for those without protection.
- Lump Sum and Death Benefit Allowance (LS&DBA)
A second allowance will be used to limit how much can be paid as a tax-free lump sum, both during lifetime and on death. This allowance will match the current LTA at £1,073,100. If you have accessed funds previously and have a large pension fund it would be wise to check the impact this will have on your situation.
Protection
For those with significant pension pots and existing Protection you should review how the changes will impact on your retirement plans, the removal of the LTA may mean that pension funding once again becomes appealing though this should only be considered after individual advice.
Summary
While there still may be further changes before any of the draft legislation is enacted, we do have a good insight on the future pension framework for 2024/25 and beyond. The removal of the Lifetime Allowance may well bring about opportunities for those with large pension funds who had previously felt it wasn’t worth making additional contributions. With the increase in the Annual Allowance to £60,000 per annum and the availability to carry forward unused relief from the last 3 years there remains the opportunity to invest large amounts tax-efficiently either personally or from your business.
If you fit into any of the scenarios described below, we would suggest speaking with an adviser to understand how the rule changes will impact your own personal situation:
- Individuals with existing LTA Financial Protection where they have ceased making contributions but are now considering whether they should restart them.
- High earners who have previously been limited by the Tapered Annual Allowance who may well have greater capacity to fund their pension.
- Those with larger pension funds who are wondering how the changes will affect their ability to pass on funds onto their chosen beneficiaries.
If you would be interested in a free consultation, our expert Chartered Financial Planners are well positioned to help you understand how the proposals will impact on your personal situation and look proactively how to best manage things on your behalf. Contact us.
