Changes to the Lifetime Allowance – Introduction
The enactment of the Finance Act 2024 marks a significant overhaul of the UK’s pensions tax framework, particularly with the abolition of the Lifetime Allowance (LTA).
This adjustment, initially announced in the Spring 2023 Budget, removes a cap that has governed tax-efficient pension savings since 2006.
Key Changes Introduced by the Finance Act 2024
The key changes can be summarised as follows:
Abolition of the Lifetime Allowance
The LTA, a cornerstone of pension savings taxation, has been dismantled, removing the upper limit on tax-efficient pension savings.
Introduction of New Allowances
To replace the LTA, two new allowances have been introduced:
Lump Sum Allowance (LSA)
Caps tax-free pension commencement lump sums (PCLS) or the tax-free portion of un-crystallised funds pension lump sums (UFPLS).
Lump Sum and Death Benefit Allowance (LSDBA)
Sets the combined lifetime and death benefits cap.
For the 2024/25 tax year, the LSA is set at £268,275, and the LSDBA is £1,073,100.
Pension Commencement Excess Lump Sum (PCELS)
This new provision allows for further lump sum payments beyond the LSA limits, subject to marginal-rate income tax.
Overseas Transfer Allowance (OTA)
Caps tax-free overseas transfers, aligning with an individual’s LSDBA at £1,073,100 for the 2024/25 tax year.
Revision of Reportable Events
The obligation for scheme administrators to report LTA-related events to HMRC has been replaced with a requirement to report payments exceeding the LSA/LSDBA limits.
New Information Requirements for Individuals
Members receiving a PCLS must now receive “Relevant Benefit Crystallisation Event (RBCE) statements,” detailing the remaining mounts of their LSA and LSDBA.
Actions for Trustees
General
In light of these substantial changes, trustees of occupational pension schemes should consider two primary actions:
Engage with Scheme Administrators
Trustees should ensure administrators are prepared for the incoming changes, including the incorporation of new lump sum allowances in retirement planning and compliance with reporting requirements.
Additionally, trustees should verify that any ongoing buy-out transactions with insurers consider the updated framework.
Review and Amend Scheme Rules
Trustees may need to amend scheme rules to accommodate the ability to pay PCELS, remove outdated references to the LTA, and potentially adjust benefit accrual limits. While an overriding amendment in the Finance Act 2024 provides temporary relief, proactive adjustments may simplify scheme governance in the long run.
Changes to the Lifetime Allowance – Conclusion
The Finance Act 2024 represents a shift in the taxation of pension savings in the UK.
By abolishing the Lifetime Allowance and introducing new allowances and reporting requirements, the Act aims to simplify the pensions tax landscape.
Of course, it hasn’t done any such thing!
Final thoughts
If you have any queries about this article on changes to the lifetime allowance, or other UK tax matters, then please get in touch.