Changes to pension tax allowances
Replacement of the Lifetime Allowance
Since 2006, pension savings have been subject to a Lifetime Allowance (LTA), which places a limit on the total pension savings you can build up across all your pensions before having to pay additional tax. For the 2022/23 tax year, the LTA stood at £1,073,000. Pension savings above this amount were subject to additional tax charges (known as the LTA charge) on payment of benefits.
In March 2023, the Government announced that it would be removing the LTA tax charge with effect from 6 April 2023, and abolishing the LTA altogether from 6 April 2024. These changes have now been implemented by the Government.
What does this mean for Pension Fund members?
Most members weren’t affected by the LTA, but if you are someone that was likely to be impacted then the changes are good news because you can now save more for your retirement without incurring an LTA tax charge. There will, however, still be a limit on the amount of money you can take as a tax-free lump sum at retirement.
New pension tax allowances applying from 6th April 2024
From 6 April 2024, there are two new lump sum allowances which will determine how much total tax-free cash can be paid to you or your beneficiaries.
These allowances apply per person (not per scheme) and apply only to lump sums paid to or in respect of a member, not to pensions. These allowances are:
- Lump Sum Allowance (LSA): this is a fixed cumulative limit of £268,275 (25% of the Lifetime Allowance when it was abolished). It applies to the amount of tax-free cash that can be paid to a person as a pension commencement lump sum and as the tax-free part of an uncrystallised funds pension lump sum. If you exceed this limit, the amount over the limit will generally be taxed as income. Members with existing LTA protection may have a higher limit before they are liable to pay tax.
- Lump Sum and Death Benefit Allowance (LSDBA): this is a fixed cumulative limit of £1,073,100 (the same as the LTA when it was abolished). It applies to the tax-free elements of lump sums that can be paid in life and death, to or in respect of an individual. In addition to the pension commencement lump sums and tax-free elements of an uncrystallised funds pension lump sum, this allowance also applies to the tax-free elements of serious ill-health lump sums and lump sum death benefits. Members with existing LTA protection may have a higher tax-free limit.
It is recommended that you take independent financial or tax advice if you had LTA protection (e.g. primary, enhanced, individual or fixed protection) or think you may be affected by the new lump sum allowances. Further information would be provided by the Pension Fund Office at the time you draw benefits to let you know if your pension benefits from the Fund are likely to be impacted by the new allowances.
