How the abolition of the Lifetime Allowance could benefit your financial plan

In the 2023 Budget, former chancellor Jeremy Hunt announced the abolition of the Lifetime Allowance (LTA) for the 2024/25 tax year.

The LTA was the maximum amount you could hold in pension savings before you’d pay a tax charge

The exact figure changed over the years, but in the final 2023/24 tax year before it was abolished the limit was £1,073,100.

If your pension savings exceeded this figure, you would have to pay a 55% tax charge on the excess if you withdrew it as a lump sum, and 25% plus Income Tax at your marginal rate if you took it as income.

Previously, you may have had to find alternative ways of saving and investing for fear of your pension reaching the threshold. But now you can build your pension without the worry of paying an additional tax charge, though there are some allowances in place of the LTA, which could lead to taxes being due.

Read on to discover how the abolition of the LTA could benefit your financial plan and what allowances the previous Conservative government introduced in its place.

You can still benefit from the Annual Allowance

Though the LTA has been abolished, the Annual Allowance is still in place. The Annual Allowance is the maximum amount you can tax-efficiently contribute to your pension in a single tax year.

In 2024/25, it stands at £60,000 or 100% of your earnings, whichever is lower. Your Annual Allowance may be lower if your income exceeds certain thresholds or if you have already flexibly accessed your pension.

There are 3 new allowances in place of the Lifetime Allowance

In place of the LTA, there are three new or adapted allowances:

· A new cap for the Lump Sum Allowance (LSA)

· Lump Sum and Death Benefit Allowance (LSDBA)

· Overseas Transfer Allowance (OTA).

These allowances apply for most people but may differ if you previously applied for LTA protection.

1. Lump Sum Allowance

The LSA refers to the amount of your pension you can withdraw as a tax-free lump sum.

Prior to the abolition of the LTA, you could withdraw up to 25% of your pension as tax-free cash. The 25% limit is still in place, but – unless you have transitional protection – it is capped at £268,275 across all your pensions, which just so happens to be 25% of the old LTA.

So, even if you accrued £2 million in your pension savings, you would still only be able to withdraw £268,275 as tax-free cash, not £500,000. 

2. Lump Sum and Death Benefit Allowance

The LSDBA is the tax-free limit that your beneficiaries can receive from your pension when you die.

If you die before the age of 75, your beneficiaries can receive the money left in your pension pot without paying tax up to the previous LTA limit of £1,073,100. Any amount over the limit may be taxed at the beneficiary’s marginal rate of Income Tax.

If you plan carefully, and set your pension up correctly, you could pass your pension wealth on to beneficiaries tax-free, even if you exceed this limit. This is something we can help with, so please get in touch to learn more.

If you die aged 75 or older, the lump sum is taxable at the beneficiary’s marginal rate regardless of the amount.

3. Overseas Transfer Allowance

The OTA is a limit on the amount you can transfer from a UK pension to an overseas pension scheme without facing extra tax charges. The OTA is also currently set at the previous LTA limit of £1,073,100.

The abolition of the Lifetime Allowance allows you to make more tax-efficient pension contributions

Pensions are a highly tax-efficient savings method due to the tax relief available on your contributions.

When you contribute to your pension, you automatically receive 20% tax relief from the government, meaning an £800 contribution effectively becomes £1,000.

If you are a higher- or additional-rate taxpayer, you can claim a further 20% or 25% respectively, through your self-assessment tax return.

While the abolition of the LTA means that there's no longer a cap on the total amount you can save in this tax-efficient way, the Annual Allowance remains in effect.

Any contribution above the Annual Allowance threshold may not benefit from tax relief. However, you can backdate your Annual Allowance. This allows you an opportunity to increase your contributions and use up any Annual Allowance you may have from any of the previous three tax years.

On top of this, assets invested in your pension can also benefit from tax-free growth.

The abolition of the Lifetime Allowance could also benefit your retirement and estate plans

The LTA might have previously prompted you to stop working upon reaching your limit. But now, with the removal of the LTA, you have the opportunity to continue working and further top up your pension fund with your earnings.

Working for even one additional year could significantly boost your retirement savings. Not only will you make additional pension contributions, but you will also reduce the number of years you need to draw from it.

When it comes to your estate plan, your pension does not normally form part of your estate for Inheritance Tax (IHT) purposes. So, the removal of the LTA could also improve your ability to use your pension as a tax-efficient estate planning tool. 

Maximising your pension contributions could reduce the net value of your estate and boost the value of your pension fund for your nominated beneficiaries. 

Get in touch

To find out more about what the abolition of the LTA could mean for you and how you can make the most of it, get in touch.

Email info@mlpwealth.co.uk 020 8296 1799.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.