What did the Chancellor say?
The Chancellor announced in his speech;
“Some have also asked me to increase the Lifetime Allowance from its £1 million limit. But I have decided not to do that.
Instead I will go further and abolish the Lifetime Allowance altogether. It’s a pension tax reform that will stop over 80% of NHS doctors from receiving a tax charge, incentivise our most experienced and productive workers to stay in work for longer and simplify our tax system, taking thousands of people out of the complexity of pension tax.”
What does this mean for the planner?
In the budget paperwork it has been confirmed that the Lifetime Allowance (LTA) charge will be removed for the 2023/24 tax year. This will then be abolished from April 2024 in a future Finance Bill.
Additionally Pension Commencement Lump Sum which for most has been capped at the lower of 25% of the fund value or 25% of their available LTA at the time this sum is taken will change. This measure will set a PCLS upper monetary cap of £268,275 (25% of the current LTA) and will be frozen at this amount. However, those individuals who already have a protected right to take a higher PCLS will continue be able to do so.
Further to this, where LTA excesses were paid as lump sums, they were subject to a standalone 55% tax charge. From 6 April 2023 this measure ensures that, in such cases, these lump sums are instead taxed at an individual’s marginal rate of income tax.
The devil will be in the detail of the Spring Finance Act on the LTA charge change and the future Finance Act that will deal with the LTA abolition. Clarification will be needed for those with scheme specific tax free cash along with details on those with enhanced or fixed protection as to whether or not they can start contributing to pensions again given there is still technically a LTA for 2023/24.
Furthermore, just because the LTA is being removed the key issue is net benefit for the client. For a higher rate taxpayer now and in retirement if the contribution made will not obtain PCLS then it could be a cost neutral exercise for them. It would cost them £60 to get £100 in a pension, and when taken if taxed at 40% they would get their £60 back assuming no growth. This would still be better than the current rules where if they had the 25% LTA charge applied the would have received £45 back.
However, under the new rules with no LTA charges if they were basic rate in retirement this would return them £80 (a 33.33% return).
There may also be other issues such as IHT planning to take account of, but this would then depend on the beneficiaries marginal rates of taxation.