Untangling the new Lifetime Allowance rules on UK pensions
January 15, 2024
By Jessica Cook
From 6 April 2024, the LTA will be no more. Yet, it’s not that straightforward. Here’s why:
With the Lifetime Allowance removed, two new limits are being introduced, specifically to control tax relief on lump sums:
All benefit crystallisation events relating to taking income and the age 75 test will be removed. But under the new regime, lump sums will be tested.
And especially for all you Financial Planners out there – some new acronyms for you to learn!
Lump Sum Allowance (LSA) – Set at 268,275
Lump Sum Death Benefit Allowance (LSDBA) – Set at 1,073,100
There is also a new Overseas Transfer Allowance (OTA) set at 1,073,100 which applies for QROPS transfers.
Under the new regime, lump sums undergo testing against the new LSA. The tests apply to:
PCLS – Pension commencement lump sums
UFPLUS’s tax-free part – Still available with 25% tax-free up to the available LSA.
Death Benefits’ Taxation
Death benefit taxation remains largely the same, in so far as funds can still pass free from tax before death at age 75. But Lump sum death benefits will be tested against the available LSBDA. Any amount exceeding the LSBDA is taxable.
Beneficiaries should therefore seek income-taking options if there is a risk of exceeding the LSBDA, since only lump sum benefits undergo LSDBA testing. If a pension holder dies before age 75, unlimited funds can be transferred tax-free if taken as income.
For those with Fixed or Individual lifetime protections, the protected PCLS and LTA amounts previously held will become the individual LSA and LSBDA respectively.
Transfers to a QROPS will now also be tested against the Overseas Transfer Allowance (OTA). Transfer amounts exceeding this threshold amount are subject to a 25% Overseas Transfer Charge (OTC).
Will there be a U-turn?
Hours after the Conservatives announced their plans to abolish the LTA, Labour opposed the change. Promising to reverse it given electoral victory.
But reintroducing the LTA is not as simple as pasting back into legislation every line which has been taken out. Careful consideration would need to be given to transitional arrangements, including for those who had made savings decisions during the period in which the LTA had been abolished.
But, of course, for now, we must run with the current rules.
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