Advisers are being encouraged to familiarise themselves with incoming legislation around the abolition of the Lifetime Allowance (LTA), with new planning opportunities which could help clients maximise pension tax efficiency.
According to AJ Bell, the permanent abolition of the pensions LTA from 6 April brings with it a range of supporting legislation, including three new allowances – the Lump Sum Allowance (LSA), the Lump Sum and Death Benefits Allowance (LSDBA) and the Overseas Transfer Allowance (OTA).
With the Finance Bill finalising its journey through Parliament, the key elements of the new pension tax regime are already known. AJ Bell is encouraging advisers to gen up on the new rules and explore new pension tax planning opportunities which may be available to clients from April.
Advisers and clients may wish to explore:
- Shielding benefits from tax when testing against the LSDBA on death before age 75 by ensuring pensions offer beneficiaries income drawdown and that nominations are up-to-date
- Whether those with fixed or enhanced protection may wish to start rebuilding pension funds
- New flexibility available when taking pension commencement lump sum (PCLS) for those with both DB and DC pensions.
AJ Bell is hosting free webinars from its technical team and downloadable guides for advisers through its website to help advisers fully understand the new rules and the effect on clients’ pension planning.
AJ Bell head of public policy, Rachel Vahey, says:
“The LTA may soon be a distant memory, but that doesn’t mean the new pension rules are simple. Far from it. Advisers will want to spend some time now getting up to speed with the new rules and how they work in practice.
“Most advisers will have clients who will be affected by the change. There are new opportunities to support these clients in making more tax-efficient pension choices. Making sure beneficiaries can access benefits through income drawdown in a modern pension environment will be a key way to shield inherited pensions from an unwanted tax bill should clients die before age 75.
“From April, advisers and clients can wave goodbye to the dreaded ‘age 75 test’ in drawdown. But that also may mean reviewing advice given to clients on the retirement income stream they take.
“For many individuals, pensions will be an important part of their legacy planning strategy. This is a good opportunity to speak to clients and prospective clients not just about their own pension income strategy, but also their plans for passing on money to their family.”
- Shield benefits from tax when testing against the LSDBA using income drawdown
When a pension saver dies before the age of 75, lump sums paid to beneficiaries will be tested against the LSDBA.
The LSDBA sets a £1,073,100 limit on tax-free lump sums that can be paid from all pension schemes (although it could be higher if the individual has some form of LTA protection).
However, all income drawn can be paid without any tax charges – whether the beneficiary chooses to take a small regular income or even if they choose to take a large single payment.
Not all pensions offer beneficiaries drawdown, so it is essential to check this is available to any individuals that may be impacted by the LSDBA.
If the pension saver dies after age 75, then all benefits paid – whether as income or as a lump sum – will be subject to income tax at the beneficiary’s marginal rate.
How income tax applies to pension death benefits after April 2024:
| Beneficiary takes pension benefits as drawdown/income | Beneficiary takes pension benefits as a lump sum | ||
| Member dies before age 75 | Up to lump sum and death benefit allowance | No tax | No tax |
| Excess | No tax | Taxed | |
| Member dies after age 75 | Up to lump sum and death benefit allowance | Taxed | Taxed |
| Excess | Taxed | Taxed |
*Where taxed any pension benefits paid to an individual are taxed at their marginal rate. If benefits are not paid within two years of the scheme being notified of the death, then the whole amount is subject to income tax, regardless of how it is paid.
- Those with fixed or enhanced protection may wish to restart rebuilding pension funds
Through a series of cuts the LTA was reduced from £1.8 million in 2010 to £1 million in 2016.
Every time it was cut protections were put in place to prevent those with substantial funds losing out.
Those people who hold enhanced or fixed protection could keep the previous higher LTA, under the condition that no further individual or employer contributions were paid in to pensions.
| Type of protection | Date contributions had to stop | LSA | LSDBA |
| Enhanced | 5 April 2006 | Not on certificate – £375,000 | Fund value as at 5 April 2024 |
| On certificate – maximum of stated percentage of the fund crystallised, or percentage of fund as at 5 April 2023 | Fund value as at 5 April 2024 | ||
| Fixed protection 2012 | 5 April 2012 | £450,000 | £1,800,000 |
| Fixed protection 2014 | 5 April 2014 | £375,000 | £1,500,000 |
| Fixed protection 2016 | 5 April 2016 | £312,500 | £1,250,000 |
As part of the reforms involved in scrapping the LTA, those who have fixed protection or enhanced protection on 15 March 2023 can start to pay into their pension schemes again.
These people can kick start their pension saving and will no longer miss out on valuable employer pension contributions. This will be especially helpful to those who want to take an income in retirement or make up lost pension funds following a pension share on divorce.
However, pension savers with protection are still restricted to the level of tax-free cash they can take, so paying in more contributions will not increase their PCLS entitlement.
- New flexibility for those clients who hold both defined benefit (DB) and defined contribution (DC) pensions.
Those holding both DB and DC pensions will have more flexibility to choose which scheme to take PCLS from to maximise their pension benefits. This will be especially valuable to those who want to take their full PCLS but want to avoid exchanging their DB pension for tax-free cash because of poor value exchange rates (commutation factors).
For example:
Rita has a DB pot from which she can take a maximum of £100,000 PCLS, she also has a SIPP valued at £1.2m.
If she takes the £100,000 PCLS from her DB scheme, she will have £168,275 LSA remaining so will be able to take this amount of PCLS from her SIPP. This is the same position as under the old rules.
However, Rita’s DB scheme offers a low commutation factor. She could instead choose not to take any PCLS from her DB scheme securing a higher scheme pension. Importantly, this would not use up any allowances, so she could take her full PCLS up to the LSA of £268,275 from her SIPP.
