Tax Profressional usually responds in minutes

Our tax advisers are all verified

Unlimited follow-up questions

  • Sign in
  • NORMAL ARCHIVE

    Lifetime Allowance changes – an overview

    Lifetime allowance changes – Introduction

    In July the Government published draft legislation dealing with the abolition of the lifetime allowance (LTA) with effect from 6 April 2024.

    The draft legislation provides for the introduction of two new lump sum allowances which will apply to an individual and are used when a relevant lump sum is paid in respect of an individual and at least part of that lump sum is tax free.

    The new allowances are the lump sum and death benefit allowance of £1,073,100 (the same as the LTA immediately before its abolition) and the lump sum allowance of £268,275 (25% of the LTA immediately before its abolition).

    More detail on the new lump sum allowances

    The individual’s lump sum allowance is used when the individual takes tax free cash in the form of:

    The individual’s lump sum and death benefit allowance is used when the individual takes tax free cash in the form of an authorised lump sum and also when a person receives tax free cash in the form of an authorised lump sum death benefit in respect of the individual.

    Where part of a lump sum is taxable and part isn’t, only the tax free element counts towards the relevant lump sum allowance.

    Pension benefits will be taxed through the existing income tax structure for pension income. To the extent that a lump sum is taxable, it will normally be taxed at the recipient’s marginal rate of income tax.

    A “pension commencement lump sum” equating to 25% of the value of the benefits being taken can generally be taken tax free provided the individual has sufficient headroom available under both types of lump sum allowance. 25% of an UFPLS will also be tax free provided the individual has sufficient lump sum allowance headroom.

    Any amount in excess of the limits will be taxed as pension income.

    Lump sum death benefits paid within 2 years in respect of a deceased member aged under 75 will generally still be tax free provided there is sufficient headroom under the deceased individual’s lump sum and death benefit allowance. Any excess will generally be taxed as income in the hands of the recipient.

    LTA protections

    The draft legislation contains extensive provisions dealing with individuals who currently benefit from the various statutory protections in relation to the LTA.

    “Primary protection” will cease to exist, but will be replaced with a new set of protections.

    For individuals with enhanced protection, their “applicable amount” for a pension commencement lump sum is the amount that could have been paid on 6 April 2023.

    The deadline for applying for fixed/individual protection 2016 will be 5 April 2025.

    Transitional measures

    The Government plans to publish transitional provisions to deal with the situation where one or more lump sums have been paid in respect of an individual before 6 April 2024, but at least one further lump sum is paid on or after that date.

    No intention to significantly expand pension freedoms

    When the draft legislation was first published, the Association of Consulting Actuaries suggested that it would have the effect of extending to defined benefits the “pension freedoms” that have applied to money purchase benefits since 6 April 2015.

    In its Pension schemes newsletter 152 HMRC has confirmed that it is not the Government’s intention to significantly expand pension freedoms.

    Conclusion

    As we prepare for the abolition of the lifetime allowance (LTA) and the introduction of new lump sum allowances in April 2024, the UK pension landscape is undergoing a transformative shift.

    These changes, unveiled in the government’s draft legislation, bring both challenges and opportunities for individuals and pension scheme providers.

    Understanding the intricacies of the individual lump sum allowance, the lump sum and death benefit allowance, and the taxation implications for various scenarios is paramount.

    The introduction of transitional measures and the preservation of certain protections, albeit with modifications, underscore the government’s commitment to managing this transition smoothly.

    Importantly, HMRC’s assurance that there will be no significant expansion of pension freedoms in relation to defined benefits provides clarity in an ever-evolving landscape.

     

    If you have any queries about the lifetime allowance changes, or any other UK tax matters, then please do get in touch.

    How much do you need for a comfortable retirement in the UK?

    The cost of retirement is increasingly becoming a concern, with rising food and energy prices contributing to the growing expenses. In fact, the amount needed for a minimum living standard in retirement has surged by nearly £2,000 in the past year.

    As you diligently contribute to your personal or workplace pension plan, it’s essential to have a clear understanding of the funds required to support your post-work life. Fortunately, the recently updated Retirement Living Standards, developed by the Pensions and Lifetime Savings Association (PLSA), offer valuable insights into the annual income necessary for a comfortable retirement.

    By utilising these standards, combined with our comprehensive tools and resources, you can effectively plan for the future you desire.

    For single pensioners, the minimum required to survive has increased by 18% to £12,800 per year in 2022. Retired couples face an even greater rise of 19%, now needing a minimum of £19,900 annually, representing a £3,200 increase, according to a study conducted at Loughborough University and funded by the PLSA.

    Don’t let the cost of retirement catch you off guard. Take proactive steps today to assess your financial needs and plan for a secure future. Leverage the Retirement Living Standards and our resources to make informed decisions and confidently navigate your retirement journey.

    What lifestyle do you want in retirement?

    As retirement approaches, envisioning your post-work plans becomes crucial. Will you embark on exciting vacations or consider home renovations? Perhaps a new car is on the horizon. To effectively plan for your future, it’s essential to ask yourself these important questions.

    By understanding your anticipated expenses during retirement, you can determine the necessary savings required to fulfil your aspirations. Don’t overlook the significance of financial preparedness in ensuring a comfortable retirement.

    Take the time to assess your financial goals and evaluate the potential costs associated with your desired lifestyle. This proactive approach will empower you to make informed decisions and establish a robust savings plan.

    Prepare for a fulfilling retirement by acknowledging your financial needs and setting realistic goals. Begin saving now to secure the future you envision.

    What are the Retirement Living Standards?

    The Pensions and Lifetime Savings Association (PLSA) has introduced three retirement living standards, categorised as minimum, moderate, and comfortable. These standards, developed in collaboration with Loughborough University, offer valuable insights into the financial requirements across different levels of lifestyle.

    Each standard incorporates the cost of various goods and services, forming “baskets” that track price changes over time, including home maintenance, food and drink, transportation, holidays and leisure, clothing, and support for others. These standards provide a comprehensive view of the annual income needed for both individuals and couples.

    By familiarising yourself with retirement living standards, you can gain a clearer understanding of the potential costs associated with different lifestyles during retirement. Use this knowledge to plan effectively and work towards achieving your desired level of financial comfort.

    Ensure your retirement aligns with your aspirations by utilising the PLSA’s retirement living standards as a valuable resource in your financial planning journey.

    How many Britons are matching up to these standards already?

    Achieving a retirement income of £50,000 per year is relatively uncommon among pensioners. According to Loughborough University researchers, approximately 72% of the total population are projected to meet at least the minimum standard of living in retirement. Around one-fifth of the population is on track for a moderate income level, while 8% can expect a comfortable retirement. However, it’s important to note that these figures were calculated before last year’s significant inflation surge.

    Ensuring financial security during retirement is a priority for many individuals. While reaching the £50,000 bracket may be challenging, it’s crucial to plan diligently to meet at least the minimum standard of living. By staying proactive and making informed decisions, you can increase your chances of attaining the desired level of financial stability in your post-work years.

    How much you need to save

    If the prospect of relying on a monthly income of £1,000 or less in retirement is unsettling, it’s time to take action and save more before you stop working. But how much should you save?

    We consulted researchers from Loughborough University and the PLSA to determine the additional savings required for individuals and couples to reach the minimum, moderate, and comfortable retirement brackets if they retire at age 67, even with the full new state pension. The projected amounts ranged from £0 to £530,000.

    Encouragingly, the table highlights a £0 figure: If both partners receive the full £10,600 state pension, their combined income surpasses the minimum requirement of £19,900 for a comfortable retirement.

    However, the challenging reality is that a single person aiming for a comfortable retirement must save a significant £500,000 by the age of 67, all while managing mortgage or rent payments and coping with the ever-rising cost of living.

    Take control of your retirement future by calculating your savings goals. By developing a comprehensive savings plan, you can work towards achieving the financial security necessary for a comfortable retirement.

    The annual income you will need in retirement

    Living standard Single Couple

    How much do you need to save?

    Living Standard Single Couple

    Source: Loughborough University and the Pensions and Lifetime Savings Association. (London figures may vary)

    Living Standard Single Couple

    Source: Loughborough University and the PLSA

    Plan and save accordingly to achieve the desired living standard in retirement. Consider these benchmarks as you work towards securing a financially stable future.

    How much do I need to semi-retire?

    For individuals who feel unprepared to fully retire or simply prefer to stay partially active in the workforce, semi-retirement can offer distinct advantages. In this scenario, you may require a lower income compared to complete retirement since you’ll continue to receive earnings from your employer. With semi-retirement, you have the option to supplement your income by accessing pension funds or utilising other savings before tapping into your retirement plan.

    By strategically balancing work and leisure, you can enjoy financial stability while gradually transitioning into retirement. Evaluate your financial situation, including available savings and potential pension options, to determine the most suitable approach for semi-retirement. This flexible path allows you to continue saving for the future while enjoying the benefits of reduced working hours and increased leisure time.

    Secure Your Comfortable Retirement: Take Action Today

    Are you ready to plan for a comfortable retirement in the UK? Don’t leave your financial future to chance. Take control of your retirement savings with these steps:

    1. Evaluate your retirement goals: Determine the lifestyle you desire and the income needed to support it.
    2. Calculate your savings target: Use the Retirement Living Standards provided by reputable sources like Loughborough University and the Pensions and Lifetime Savings Association as a guide.
    3. Develop a savings strategy: Set aside a portion of your income specifically for retirement savings. Consider utilising tax-efficient options such as personal or workplace pension plans.
    4. Seek professional advice: Consult financial advisors who specialise in retirement planning. They can help tailor a plan to your unique circumstances and provide valuable insights.
    5. Monitor and adjust: Regularly review your retirement savings progress and make adjustments as needed. Stay informed about changes in legislation or pension schemes that may impact your savings strategy.

    Remember, the key to a comfortable retirement lies in proactive planning and taking action today. Start building your retirement nest egg and pave the way for a financially secure future with the help from Tax Natives.

    Private Sector Pensions in Gibraltar

    What’s new in Private Sector Pensions in Gibraltar?

    Following the implementation of Gibraltar’s new “auto-enrolment” pension scheme for Gibraltar’s largest employers—so-called “Enterprise” employers with over 250 staff – on 1 August 2021, the phased roll-out moved on to the second tranche of employers—large employers with more than 100 workers—who, by 1 July 2022 needed to provide a workplace pension plan.

    The Private Sector Pensions Act 2019 ensures that people living and working in Gibraltar, will be financially protected in their later years.

    Like the UK’s auto-enrolment pensions regime, the Act requires all employers in Gibraltar to provide access to a workplace pension plan and the existing State pension for all eligible employees.

    If an employee chooses to join the pension scheme, the Act requires both the employer and employee to make regular minimum contributions to the employee’s pension fund.

    Phased Roll-out

    The Act was implemented in phases to give smaller organisations more time to adjust to the new requirements.

    The following deadlines were set for employer compliance under the phased implementation:

    Enrolment

    The Gibraltar Financial Services Commission (GFSC) has been selected as Pensions Commissioner under the Act to ensure that employers and those who administer pension schemes comply with the relevant requirements.

    The GFSC maintains a register of employers who provide pension plans for their employees.

    Employers are required to register within 90 days of the dates listed above. Employers must submit the following information:

    Once an employer applies that the GFSC deems compliant with the Act, it has 21 days to enter the employer’s and its employees’ details onto the register.

    Further Obligations

    Employers must inform the GFSC of any of the following events within 30 days:

    What about Spanish-Resident Workers?

    The position of Spanish-resident workers in Gibraltar concerning whether the Spanish Ministry of Finance will accept contributions to their Gibraltar pension plan for Spanish tax relief purposes has yet to be clarified.

    As a result, many Spanish resident workers refrain from participating in pension plans provided by their employers in Gibraltar.

    During the ongoing negotiations to establish Gibraltar’s post-Brexit relationship with the European Union, hopefully this issue will be addressed.

    Seek Professional Advice on Private Sector Pensions in Gibraltar

    Tax Natives is an international tax network that connects taxpayer clients with qualified and regulated tax advisers, from one jurisdiction to another.

    Don’t miss out on Tax Natives’ latest tax updates worldwide. Click here to view

    If you have any general queries about this article, please do not hesitate to get in touch.