Author: Tim Parker
Chartered Financial Planner, Associate Director - Member of the Investment Committee
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Published: May 2023
It was certainly unexpected but welcome news when, on 15 March 2023, the Chancellor announced the end of the Lifetime Allowance. The Lifetime Allowance is the maximum size of pension fund you can have without being taxed on the excess at a penal rate, which could be 55%. The limit was £1,073,100 and this figure still has relevance as it governs the maximum amount of tax-free cash that can be drawn.
The key points are:
- Lifetime Allowance abolished.
- Tax-free cash is 25% of the pension fund subject to a maximum of £268,275.
- Annual Allowance (the maximum amount that can be contributed each year to pensions) increased from £40,000 to £60,000.
This looks great and many will line up to add to their pension savings, and why wouldn’t you with tax relief of up to 45% available?
If you have Enhanced Protection or Fixed Protection you might want to consider this carefully.
Although there are a number of different forms of protection, let’s just remind ourselves about the two key types:
Enhanced Protection
This dates back to 2006, where pension investors were given the opportunity to avoid any Lifetime Allowance charges on their pension savings provided they had not made any contributions after 6 April of that year. If any further contributions were made, the protection was lost.
Fixed Protection
Fixed Protection is where individuals have a higher limit on their pension value before a Lifetime Allowance charge would apply, in return for making no further pension savings after 6 April in the relevant year. These are:
- Fixed Protection 2012 – lifetime allowance of £1.8 million (maximum tax-free cash of £450,000)
- Fixed Protection 2014 – lifetime allowance of £1.5 million (maximum tax-free cash of £375,000)
- Fixed Protection 2016 – lifetime allowance of £1.25 million (maximum tax-free cash of £312,500)
You can still apply for Fixed Protection 2016 if no pension savings have been made since 6 April 2016. This will provide a higher maximum tax-free sum (up to £312,500) but you cannot add to your pot.
The Lifetime Allowance is scheduled to be abolished on 6 April 2024 and should render all these protections unnecessary and obsolete.
What did the Labour Party have to say?
Labour has said it would reinstate the pensions Lifetime Allowance (LTA) if elected, arguing that the government’s plan to abolish the allowance is the “wrong priority, at the wrong time, for the wrong people”.
Stick or twist?
The consequences of effectively losing Enhanced or Fixed Protection by adding to your pension savings could be very painful if Labour was to form the next government and revert to the previous Lifetime Allowance regime.
It is extremely important to seek independent advice to understand the pros and cons of adding to your pension savings in your specific circumstances.
If you would like to discuss your pension, please speak to a member of our financial planning team on 01223 233331, or email info@mmwealth.co.uk.
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 do not regulate 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.
