In the Spring Budget 2023, the Chancellor made an unexpected announcement regarding the Lifetime Allowance (LTA). Instead of raising the LTA cap, which was expected among industry experts, the Chancellor revealed plans to remove the LTA charge from 6 April 2023, with the complete abolition of the LTA set to take place in April 2024 through the Finance Bill 2024. Read more about the pensions aspects of the Spring Budget 2023 in our previous briefing. Recently, industry experts have expressed their concerns over the potential consequences of the government’s plans to remove the LTA, as the draft legislation was shared for the first time. The consultation on the draft legislation runs until 12 September 2023. As HMRC’s accompanying policy paper and the Bill’s explanatory note explain, removing the LTA brings with it a number of complications, including where to draw the dividing line between tax-free lump sums and lump sums subject to marginal rate tax in its absence. Much of the Bill therefore focuses on how member and death benefit lump sums will be taxed from 6 April 2024 onwards.
The Investing and Saving Alliance (TISA) has acknowledged that the move is expected to simplify pensions administration and make the process easier for members to navigate. However, TISA also pointed out that the LTA is essentially being replaced with a “permitted maximum” limit. Lump sums exceeding this limit will now be subject to marginal rate tax instead of an LTA charge, which is unlikely to impact most savers. Nonetheless, smaller pension pots and individuals who were never previously affected by the LTA will now be impacted by its abolition as we discuss further below
Individuals who inherit an uncrystallised pension pot from someone who passed away before the age of 75 and choose a beneficiary drawdown or annuity will now face taxation on their pension income at their marginal rate, regardless of the pension pot’s size at the time of death. For the past eight years, individuals have, in the event of a loved one’s death before turning 75, been able to inherit an untouched pension pot free of all tax. If the proposed changes are implemented, this tax advantage could be abolished in April. This would seem to be an inadvertent consequence of the proposed changes.
Some critics are also concerned that the LTA changes will only further damage the reputation and fairness of the pensions system. Constant pension changes may increase complexity and hinder consumer engagement and understanding, something that the industry has been actively trying to combat. The government, in response to the concerns, emphasised that the aim was to retain experienced individuals in the workforce and clear backlogs, particularly in sectors like the NHS. They stated that pensions tax was acting as a disincentive for senior people to continue working, which is why they chose to abolish the LTA. They are open to working with stakeholders to craft legislation that benefits savers and the economy.
Given the scale of the changes, the timeline for implementation is ambitious. The 6 April 2024 deadline may be challenging to meet, considering the need to update scheme administration processes, keep records and assess the impact of previous lump sum withdrawals. Another issue is the absence of provisions for transitional arrangements in the draft legislation, although this is common with draft legislation and it may well be combated through consultation.
As the situation unfolds, further details are expected to be revealed in the full regulations. While stakeholders are invited to respond to the policy paper and provide feedback on various aspects, it remains to be seen how the pension system will evolve and how the changes will impact pension holders in the long run. As with any significant policy shift, it is crucial to encourage open dialogue, public announcements, and transparent discussions to ensure fairness and clarity for all stakeholders involved.
Please contact Eleanor Hart (email@example.com) for advice on what the abolition of the LTA means for your pension arrangements or for any pensions queries more generally.