Published: February 2024
In last year’s Budget, the Chancellor removed the lifetime allowance charge which was 55% for sums drawn above the LTA, or Fixed Protection amount (where relevant). Sounds great but it does start to make some peoples’ pension situation super complicated.
The full new rules come into play from 6 April 2024, and include two new allowances. These are the Lump Sum Allowance (LSA) and the Lump Sum Death Benefit Allowance (LSDBA).
Tax-free Cash (LSA)
The LSA provides for a maximum tax-free cash sum of £268,275 (being 25% of the old LTA of £1,073,100). If you are fortunate enough to benefit from some form of Fixed Protection, this can be higher.
There are some circumstances where there may be additional tax-free cash that can be claimed under the new rules. Individuals will need to apply for a ‘transitional tax-fee amount’ (TTFA) certificate. This is an irrevocable decision, and it could turn out that the old rules would have been more beneficial. It is therefore absolutely crucial that professional advice is taken.
Some people who had Fixed Protection can increase their tax-free cash entitlement by making contributions to their pension.
Death Benefits (LSDBA)
The allowance will be set at £1,073,100, or higher where Fixed Protection applies. This changes the position on death before age 75. Where death occurs after 75, there are essentially no changes.
Where a death occurs before 75, typically, £1,073,100 is available without tax charge. However, this allowance does include any amounts paid out as tax-free cash or other lump sums. The excess if paid as a lump sum, will be taxed at the receiving beneficiary’s marginal tax rate. Where a beneficiary elects for a drawdown arrangement there will be no LSDBA test and income can be drawn as desired.
For some with what is known as Enhanced Protection, there could be an argument for making additional contributions by 5 April as this would increase the amount of death benefit payable. If you are not in a pension that has a drawdown option, your beneficiaries may be disadvantaged.
It is now more important than ever, that death benefit nominations are made to direct the Trustees of your pension. If this is not done, some valuable options could be lost.
You may be getting the picture now that it is a bit of a minefield and professional help should be sought.
Fixed Protection 2016
I know it seems strange, but you can still apply for Fixed Protection 2016, provided no pension contributions have been made since 6 April 2016. This could potentially give a tax-free sum of up to £312,500 on the basis that the pension fund reaches a value of £1,250,000. However, no further contributions can be made, or the benefit of higher tax-free cash will be lost.
Which party could spoil the party?
The answer is the Labour party who made it clear on Budget Day that, if they got into government, they would reverse the changes. That said, I am not sure it was the giveaway it first appeared as HMRC have followed up with details that introduce some additional taxation opportunities for the Government. It would also take some time to unwind the legislation behind this and there may be other priorities.
However, we do have to be aware of the potential for the LTA to be reinstated.
As you can see there is no ‘one-size fits all ‘answer. The most important message I can give is for you to seek professional advice.
If you would like to talk to one of our Chartered Financial Planners, please contact us on 01223 233331 or email info@mmwealth.co.uk.
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Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment.
The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.
The Financial Conduct Authority does not regulate estate planning and tax planning.
The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
