I remember when, in 2014, the then chancellor, George Osborne, stood up and stated that there would no longer be tax on pension death benefit, my immediate reaction was “What did he just say?!”.
Well, I’d suggest that Jeremy Hunt’s announcement earlier this year that he was removing the lifetime allowance (LTA) to incentivise highly skilled individuals to remain in the labour market could be viewed in the same light as Osborne’s announcement.
It quickly became apparent from the subsequent legislation that the LTA remains in place for the 2023 tax year, and it’s just the LTA charge itself that’s being removed in this tax year. The outcome is pension scheme administrators will still need to continue to carry out LTA checks when paying benefits and to issue benefit crystallisation event (BCE) statements.
The actual legislation for the abolition of the LTA is to be contained in a future Finance Bill, though we have had draft legislation covering some of the aspects of its the abolition.
The LTA is of relevance for several lump sums
Including the pension commencement lump sum (PCLAS). The individual must also have remaining LTA if the following are to be authorised payments: serious ill-health lump sum; uncrystallised funds pension lump sum (UFPLS); and winding up lump sum.
Certain death benefits paid from uncrystallised rights are again tested against the (deceased) individual’s LTA. These death benefit lump sums are a defined benefits lump sum death benefit and uncrystallised funds lump sum death benefit.
Previously, for individuals under the age of 75, any excess over the LTA for most of these lump sums would have been subject to an LTA charge at 55%. From 6 April 2023 this is no longer the case, with any excess over the LTA instead being subject to income tax at the recipient’s marginal rate.
With the Labour Party’s pronouncement immediately following the Budget statement, that they’d reintroduce the LTA if they were to form the next government, there’s a possible two-year window, and certainly this tax year, to maximise opportunities offered by the changes.
- For clients previously concerned about exceeding their LTA they may consider increasing or recommencing their funding.
- Those who’ve fully utilised their LTA could fund further pension provision but avoid an LTA charge. They will, however, have no entitlement to any additional pension commencement lump sums (PCLS).
- Individuals with uncrystallised funds greater than their LTA may wish to crystallise the full amount to hopefully reduce an LTA charge in future. There’s then, perhaps, scope for reinvesting any PCLS in an ISA or GIA, while being mindful of other tax liability consequences of taking such action.
There were other measures contained in the Act that impacted on pension saving, including a relaxation for those who held Enhanced Protection or any of the forms of Fixed Protection (FP). The change allows them to start funding their pension again, without losing their protected LTA. The caveat is their protection must have been in place before 15 March 2023. If their application was made on or after the 15 March, any benefit accrual, e.g., a contribution to a SIPP, invalidates the protection.
For the most recent variant, FP 16, holders have had to avoid any further benefit accrual for over seven years and for those that hold the 2012 variant, eleven years. It’s undoubtably the case that some people will want to make use of this relaxation.
All told, the changes contained in the Finance (No 2) Act offer some interesting opportunities for those who, in recent years, have been dissuaded from funding their pension due to concerns over exceeding the LTA.
I'll be covering this topic in more detail at illuminate live tomorrow and next week - you can book your place here and find out more by watching this short video.