Lifetime Allowance to be Scrapped in 2024
From 6th April 2024, there will be a significant shift in the UK's pension landscape: the lifetime allowance will be scrapped. This major change, announced in the Spring Budget 2023, is a part of the government's strategy to encourage economic growth and increase labour market participation, particularly among individuals aged 50 and above.
This blog explores these changes and how they might impact your financial planning.
Who Will Be Affected?
In its policy paper on the Abolition of the Lifetime Allowance (LTA), the government explains that the following groups of people need to be aware of the abolishment of the LTA:
Individual Pension Scheme Members: If you are anticipating or currently receiving lump sum payments or death benefits from your pensions, you'll need to understand how it will affect you.
Members of Non-UK Pension Schemes: If you're transferring funds to a Qualifying Recognised Overseas Pension Scheme (QROPS), these changes are also relevant to you.
Scheme Administrators: If you are administering pension schemes, adapting to the new taxation rules, such as the removal of the LTA, changes to lump sum death benefits and taxation of overseas transfers, will be necessary.
What Are the Key Changes to Note?
Let's break down the major alterations coming into effect, focusing particularly on how the decision to scrap the Lifetime Allowance will reshape the landscape for pension scheme members and administrators.
Abolition of the LTA: The LTA, introduced in 2006, set a cap on tax-relievable pension savings. This cap will no longer exist starting from 6th April 2024. This abolition is helpful to most people, as you will be able to contribute to your pension more significantly without the fear of facing a tax charge.
Freezing of the Limit on Tax-Free Cash at Retirement: The limit on tax-free cash that you can receive at retirement will be set indefinitely at its current level. This limit remains at 25% of your benefits from registered pension schemes. It is also capped at a fixed amount, known as the "Lump Sum Allowance," which is £268,275.
Introduction of the New Lump Sum and Death Benefit Allowance: A new cumulative allowance, termed the Lump Sum and Death Benefit Allowance, has been introduced. This is capped at £1,073,100, equivalent to the Standard Lifetime Allowance of 5 April 2023.
This new allowance applies to the total of all retirement cash sums and lump sum death benefits an individual receives from all registered pension schemes. These lump sum benefits will be exempt from income tax as long as they fall within this new allowance limit.
LTA Protections and Enhancements: Although the LTA is being removed, existing protections will stay, albeit with some modifications.
What Do The Policy Objectives Mean For You?
The government's recent move to scrap the Lifetime Allowance is a game-changer, especially if you're nearing retirement age. Let's review what this means for you:
Stay in or Return to the Workforce: If you've been considering retirement but are worried about financial constraints, this change aims to give you more reasons to stay in the workforce. Or, if you've already retired, it might be an incentive to come back, knowing that your pension savings are more flexible and accessible.
Less Red Tape Around Your Pension: One of the big wins here is the simplification of pension tax rules. This means more straightforward financial planning and more control for you when it comes to managing your pension savings and deciding when to withdraw them.
Implications for Businesses and Scheme Administrators
If you're a business owner or a pension scheme administrator, there's some homework to do. Adapting to these new rules will require some operational changes, but think of it as streamlining your processes for the better.
While there might be some costs involved in adapting to these changes, think of it as an investment in making pension management simpler and more efficient in the long run.
Preparing for the Change
With the Lifetime Allowance set to be scrapped in April 2024, pension savers and beneficiaries need to stay informed and prepared. Understanding these changes is key to effective financial planning in the new pension landscape. For small businesses and individuals handling pensions, keeping abreast of these developments and preparing for the transition is crucial.
At Keith Graham Chartered Accountants, we're committed to guiding you through these changes, ensuring your financial strategies align with the upcoming regulations.
If you have questions or need tailored advice, please get in touch with our team.