You’ll no doubt be aware that the pension Lifetime Allowance (LTA) has been in the news a great deal recently.

In the runup to 2023’s Spring Budget, there were rumours of an imminent rise to the allowance. In the event, though, Jeremy Hunt made a surprise announcement and scrapped the LTA altogether. 

The LTA charge, payable when the allowance was exceeded, dropped to an effective 0% with the promise of further confirmation to follow.

And while the chancellor’s Autumn Statement back in November 2023 was quiet on the LTA, its abolition was confirmed in the accompanying policy paper. 

Many in the industry hoped that removing the LTA might simplify pension processes. The introduction of three new “replacement” allowances, though, means that this might not prove to be the case.

Here’s everything we know so far, including how the new allowances might affect your client’s long-term retirement plans.

The abolition of the LTA will see replacement allowances introduced

The LTA was introduced back in 2006 and stood at £1.5 million. Until Rishi Sunak froze it in 2021, it fluctuated often, between £1.8 million in 2012 to just £1 million in 2016. From 2018, it increased annually in line with the Consumer Prices Index (CPI).

Despite rumours of a return to £1.8 million, it stood at £1,073,100 when it was abolished in 2023. This latter figure remains important post-April 2024 (more on which later).

The removal of the LTA effectively lifts the cap on pension savings your clients can accrue. This has ramifications for tax-free lump sums and death benefits.

For this reason, the Autumn Statement policy paper outlines plans for three new pension allowances your clients will need to be aware of.

Lump Sum Allowance 

At retirement, your clients will usually be eligible to take 25% of their pension pot tax-free. This might be as a portion of a one-off payment if they opt for an uncrystallised fund pension lump sum, say. Or as a pension commencement lump sum if they choose an annuity.

The 25% applies to defined contribution schemes and different rules will likely apply to clients with defined benefit plans.

While the limit is usually 25% of your client’s fund, this is applied up to a maximum amount, calculated at 25% of the LTA. 

When the LTA’s abolition was announced, the frozen LTA stood at £1,073,100, meaning the maximum tax-free cash your clients could take was £268,275 (25% of £1,073,100).

Broadly speaking, this limit will remain after April, but now it will be known as an individual’s Lump Sum Allowance (LSA).

While there are currently no provisions for increasing the LSA, clients with HMRC protection could find they have a higher entitlement. 

Understanding this new allowance could help your clients to maximise their tax-efficient pension savings and Boolers can help here.

Lump Sum and Death Benefits Allowance

Under current rules, unused pension funds usually fall outside of an individual’s estate for Inheritance Tax calculation purposes so understanding the new death benefit allowances could be crucial.

From April 2024, any lump sums your clients take, or lump sum death benefits paid out from their retirement fund will be tested against a new Lump Sum and Death Benefits Allowance. This will be set at the present LTA level of £1,073,100. 

Your clients (or their beneficiaries) will only pay tax on lump sums that exceed this amount. Tax will be payable at the highest rate the recipient pays. 

As with the LSA, this allowance could be higher for individuals with certain HMRC protections and these can be complicated. If you have clients with HMRC protection, we can help them get to grips with their new allowances so get in touch.

Overseas Transfer Allowance

Under pre-April 2024 rules, funds underwent a test against the LTA when certain Benefit Crystallisation Events (BCE) occurred. For the 2023/24 tax year, there are 13 of these, but at least nine are due to be removed. 

BCE 8 previously dealt with overseas transfers from a registered pension scheme to a qualifying recognised overseas pension scheme (QROPS) before the age of 75. This will be replaced by the new Overseas Transfer Allowance. 

The allowance will be set at the same level as the last LTA (and the 2024/25 Lump Sum and Death Benefit Allowance), usually £1,073,100.

An overseas transfer charge will likely apply, amounting to 25% of the amount exceeding the available allowance.

Get in touch

The abolition of the LTA will create new opportunities for pension savers looking to maximise the amount they take into retirement. This is especially true in light of the recently increased Annual Allowance.

There are still some legislative creases to be ironed out, meaning continued work for advisers, planners, and clients, if we are to take full advantage of the changes. At Boolers, we have decades of experience in an ever-changing financial landscape and are best placed to help your clients.

If you have clients who might be affected by the new allowances, or who might benefit from advice on HMRC protections, get in touch. Email or call 0116 240 7070.

Please note

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. 

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.