In the Chancellor’s Spring Budget of 15th March 2023, he announced that the Pension Lifetime Allowance (LTA) will be abolished. This was an unexpected move, and the knock-on impact will be larger than you may think, given the LTA is referenced across multiple areas of pension regulations. But what is the LTA, why was it brought in originally, and what does it all mean?
What is the Lifetime Allowance?
The tax-free Lifetime Allowance for your pension is the total amount you can have in your pension pot before taxes will apply. Similarly, there is an annual tax-free allowance, set at £40,000 prior to the Spring Budget. Then-Chancellor Gordon Brown imposed the LTA for the first time in 2006, where the level was set at £1,500,000. It rose to £1,800,000 between 2010 and 2012 before falling to £1,000,000 by 2016. Since then it’s crept back up to the current level of £1,073,100. Many were expecting a significant increase to the LTA to be announced in the Spring Budget, despite this level being due to be frozen until 2026, but Chancellor Jeremy Hunt had other plans.
What was announced in the Spring Budget 2023?
In his Statement, the Chancellor announced that the annual allowance would move to £60,000, an increase of 50%. Whilst the LTA framework would remain from April 2023, it would be abolished in its entirety from April 2024. The intention with this measure is to encourage those who retired early back into work, enabling them to continue saving into a workplace pension without the risk of maxing out their tax-free lifetime allowance. Similarly, the Chancellor hopes this move will dissuade those still in work but with a pension pot approaching the tax-free lifetime allowance not to retire early.
So what does this mean?
On the face of it, the Chancellor’s announcement will be very welcome for the highest earners who will now be able to build a greater pension pot for retirement. However the LTA is mentioned in a large amount of pension regulations and legislation, so there are many details that need to be ironed out by the government and the Pension Regulator. We’ve summarised them below:
- Tax free lump sum – the Pension Commencement Lump Sum amount has previously been 25% of the existing LTA, equating to £268,275. Even though the LTA will be abolished, the PCLS will remain frozen at this amount.
- 55% tax on lump sum over the LTA – From 6th April 2023, the 55% tax on Serious Ill-Health Lump Sum, Uncrystallised Funds Lump Sum Death Benefit, Defined Benefits Lump Sum Death Benefit and Lifetime Allowance Excess Lump Sum will be dropped. Instead, payments will be taxed at the individual’s marginal rate.
- 2006 pension protection – as the LTA fell several times since its inception, many took out protection against the declining amount. The caveat to this was that no more funds could be contributed to the pension pot in order to preserve the higher lifetime allowance. With the new LTA abolition announcement, a further announcement has been given that individuals who hold valid fixed protections applied for before 15th March 2023, they will be able to accrue new pension benefits, join new arrangements or transfer funds without losing the protection.
