UK Abolishes Lifetime Allowance (LTA) on Pensions
UK Abolishes Lifetime Allowance (LTA) on Pensions
In his spring budget for 2023 the UK chancellor Jeremy Hunt unveiled a major policy change surrounding pensions - the complete abolishment of the Lifetime Allowance (LTA). This was a widely unexpected move and will potentially save individual pensioners tens of thousands of pounds in taxes throughout their lifetimes.
What is LTA?
The LTA was introduced by the UK in 2006 as a mechanism for limiting tax-favored pension savings in registered pension schemes. There is no limit on the tax relief provided but it is recouped by charges when the LTA is exceeded and paid upon crystallization events.
The LTA for tax year 2022/23 is £1,073,100 and has been frozen at this level until the 2025/26 tax year.
Why is LTA being abolished?
According to the HMRC, “This measure supports the government’s efforts to encourage inactive individuals to return to work, in particular those aged 50 and above, and it removes incentives to reduce hours or leave the labour market due to pension tax limits. Evidence suggests that recent increases in inactivity have been driven primarily by those aged 50-64, and self-reported retirement has been the main driver for these individuals to leave the labour market. The measure supports individuals’ ability to build up retirement savings and so improves the financial incentive of work whilst continuing to balance the cost of pensions tax relief.”
What does this mean for you?
Many individuals might think that the LTA would only affect the rich, however there is a strong likelihood that many more individuals would be affected by the LTA tax due to compounding growth of their pension savings overtime.
Tax planning has been extremely complicated surrounding this issue as well and it is a relief that this will no longer be a concern moving forward.
It is our view that individuals will no longer have to pay any LTA taxes on pensions exceeding the LTA limit from April 2023.
How does this affect my 25% pension commencement lump sum (PCLS)?
Another significant change in the budget surrounds the 25% PCLS payment that individuals have access to from the age of 55. The HMRC has now placed a limit on the PCLS to its current maximum of 25% of the current LTA £1,073,100 (£268,275 PCLS), unless individuals hold a valid LTA or PCLS protection. See below examples:
- Individual does not have PCLS protection - Maximum PCLS is 25% of the current LTA of £1,073,100 (ie. £268,275 PCLS).
- Individual has Fixed Protection 2016 up to £1,250,000 - Maximum PCLS is 25% of the LTA protection (ie. £312,500 PCLS).
- Individual has LTA protection up to £1,500,000 - Maximum PCLS is 25% of the LTA protection (ie. £375,000 PCLS).
You may have a different type of protection than listed above. If that is the case, the maximum PCLS should be 25% of the LTA protection limit.
Questions?
You can read the official release from the HMRC here.
If you have any questions, please do not hesitate to contact us.
Disclosure:
Please note that we are not tax advisors and the content of this article or email is for informational purposes only and should not be construed as or relied upon as investment, legal or tax advice in any circumstance or fact situation. Always consult an attorney or tax professional regarding your specific legal or tax situation.
