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The Lifetime Allowance is DEAD! (or is it)

May 17, 2024

Now that the 2024 tax year is in full swing, we should perhaps discuss the biggest change of the year. Yes indeed, the pension lifetime allowance (LTA) has been abolished. Woohoo! We no longer need to know the iconic £1,073,100 lifetime allowance, or whether we have enhanced, primary, individual, or fixed protection, from 2012, 2014, or (my personal favourite) 2016 – which bizarrely you can still apply for provided you meet the criteria.

But wait? If lifetime allowance no longer exists – why can you still apply for it? Until 5th April 2025 no less.

Well, abolished might be an exaggeration. Let me tell you a little more.

It is true that there is no longer a lifetime allowance tax charge levied on funds above your personal lifetime allowance, or if you don’t have one, the current lifetime allowance of £1,073,100. However, that doesn’t mean that figure is meaningless, far from it.

You may be aware that with pensions you can have up to 25% of your fund as a tax-free pension commencement lump sum (PCLS). It is sometimes the only thing that people know about pensions, and is, as described by mainstream media, and indeed Chancellors, a ‘much loved’ benefit of pension planning.

Truthfully, it is only one of the tax advantages of a pension investment, and whilst material, for many pensioners may not even be the most important. But not withstanding reality, in many people’s eyes, the 25% tax-free ‘bonus’ is the reason for contributing into pensions.

The PCLS still exists – but it is capped at 25% of your old lifetime allowance – which is no longer called a lifetime allowance. Instead of one boring old LTA we now have:

  • The lump sum allowance (the amount you can have as a tax-free cash payment – hereafter called the LSA)
  • The lump sum and death benefit allowance (which just so happens to be the same as the old lifetime allowance, and is now going to be the LSDBA)
  • The overseas transfer allowance (ditto, and now known as the OTA)

So, three new allowances in place of one old one. That’s a plus, right?  Well, kinda. In the old days, a few weeks ago, if you died before you reached age 75 then your pension funds were left free of tax to your beneficiaries in most circumstances. Now any tax-free benefits taken while alive are not only deducted from the LSA, but also the snappily titled LSDBA – so in effect any pension benefits in excess of your LSDBA will be taxable at your beneficiary’s personal marginal tax rate when they take them. Simples!

If you’re over 75 (and hopefully you will be by the time this is relevant), then no change.

Even simpler!

The benefit of the new regime are that we can ignore all the tedious calculations of percentage of allowance, and just accept that you get a set maximum allowance, and that until you’ve used it, you can continue to ‘top up’ until you get there. This is genuinely simpler, and more intuitive than the old system where complex calculations could be required to see how much PCLS you could take, depending on the regime in question when you previously took benefits.

However, what happens if you took a pension under the old regime, but didn’t take a lot (or any) tax-free PCLS? Perhaps your final salary pension had a rubbish conversation rate for changing income to cash.  Or you had a guaranteed annuity rate that meant taking PCLS was not the right thing to do. Enter the Transitional Tax-Free Amount Certificate (TTFC). This is a wonderful opportunity to valid the £ amount of tax-free PCLS you might have received and disassociate this from the percentage of the old lifetime allowance that you have taken instead.

But – you have to apply for this (and receive it) before taking any benefits from a pension after the 6th April this year (so it may already be too late for some of you), and it will take a couple of months, as providers all have to compare notes. Worse still – if you ever had a scheme where your PCLS was more than 25% then the TTFAC may actually REDUCE the amount of tax-free cash you can receive under the new rules – and unlike the various protection regimes, once you have a TTFAC, it’s yours for life, you cannot cancel it.

On the 17th March 2004 then Chancellor Gordon Brown announced ‘Pension Simplification’ – when with effect from ‘A’ day, the 6th April 2006, all previous pension legislation regimes would be swept away, and replaced with one simple, clear, and easily understood regime that would stand the test of time.

As perhaps you can see, twenty years on, the legacy of ‘A’ day has not quite been the transparency or clarity that was perhaps desired. For the last twenty years I have ‘humorously’ remarked as part of my ‘patter’ that as long as the Government continues to ‘simplify’ pensions I’ll never be out of a job as a ‘Pension Specialist’. With the new rules still wet on the page, that has never seemed more true.

The new rules are a genuine step forward in simplicity, but if you have any pension benefits from before April 2024 (and it seems unlikely that many reading this won’t fall into that category) then there is still complexity in how your existing arrangements are affected, and it may be worth investigating to ensure you receive the best outcome.

At Walden Capital we take our commitment to provide independent bespoke advice to our clients seriously. If you’d like to know more, get in touch.

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The latest news, information and opinion on the current financial situations and trends plus useful guides to investing, pensions and making the most of your wealth.

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