The government announced that it would be abolishing Lifetime Allowance (LTA) in March 2023 with changes effective of 6 April 2024. However, the removal of LTA has not meant people can access more tax free cash from larger pension pots. Not helped by lack of clarity, HMRC errors and a new system that looks suspiciously like the old one; the Lifetime Allowance changes have caused much confusion, so we asked our Pension Specialist Simon Garber to simplify them for us.
Lifetime Allowance Rules: What’s Changed
Lifetime Allowance (LTA) was abolished in 2023 and has been replaced by a new set of allowances that impact those with pension pots over £1,073,100.
In short, not much has changed for most people. The government hasn’t so much abolished Lifetime Allowance as rebranded it.
The Lifetime Allowance (LTA) affected those with large pensions, limiting the amount of tax-free cash they could access from their pension. LTA has been removed and replaced with a new set of rules.
The new pension allowances work in much the same way as the old LTA, with a couple of distinctions which include getting rid of the Lifetime Allowance Assessment.
The New Pension Allowances
Instead of LTA, There are now 3 new allowances:
Lump Sum Allowance (LSA) – which limits the amount of tax free cash you can access from your pension pot.
Lump Sum and Death Benefit Allowance (LSDBA) – limits the amount of tax free lump sums you can access from your pension pot AND caps the amount of tax-free lump sums that can be paid to beneficiaries after your death
Overseas Transfer Allowance (OTA) – limits the amount you can transfer to a qualifying recognised overseas pension scheme (QROPS) without incurring tax charges
Lump Sum Allowance (LSA)
Most people are aware of the pension rules that allow them to access the first 25% of their pension pot tax-free. The new Lump Sum Allowance (LSA) caps the amount of tax-free cash you can access from your pension at £268,275.
Lump Sum and Death Benefit Allowance (LSDBA)
The Lump Sum and Death Benefit Allowance (LSDBA) which replaces the old LTA limits the amount of tax free lump sums you can access from your pension pot AND it also caps the amount of tax-free lump sums that can be paid to beneficiaries after your death.
The standard LSDBA is £1,073,100. Any amount you access over your allowance is subject to income tax at your marginal rate.
It also applies to serious ill-health lump sums paid before you reach age 75, and lump sum death benefits if you die before age 75.
Overseas Transfer Allowance (OTA)
The Overseas Transfer Allowance (OTA) only applies to those transferring their pension abroad to a qualifying recognised overseas pension scheme (QROPS). Your pension will now be assessed against your OTA rather than LTA.
The standard OTA will be the same as your LSDBA, but it won’t be reduced by tax-free lump sums you take on or after 6 April 2024. It will only be reduced by the value of the transfers you make to QROPS.
Any transfer to a QROPS that exceeds your Overseas Transfer Allowance will be subject to the Overseas Transfer Charge – a flat rate tax charge of 25%
Exceptions and exemptions to the new rules
There are a few exceptions and/or exemptions to the new rules
- Currently, if you die, the LSDBA only applies to tax-free lump sums and not when beneficiaries access the benefits through a drawdown pension – and income will usually be tax-free if you die before age 75.
Some people may have a higher or lower LSDBA allowance:
- If you have a protected lifetime allowance amount, this will be taken into account
- There are also transitional rules for those affected by the old Lifetime Allowance rules who had partially accessed their benefits before these new rules came into play (although these rules don’t apply to those who hadn’t previously accessed their pension or who had already fully crystallised their benefits before the changes).
The New Pension Allowances vs Lifetime Allowance
The ‘abolition’ of the Lifetime Allowance does seem more like a political game of smoke and mirrors:
The LSA which is capped at £268,275, works out at 25% of the old Lifetime Allowance amount – so nothing’s changed in terms of the amount of tax-free cash you can access.
The standard LSDBA is £1,073,100 – again, the same as the old Lifetime Allowance amount.
Where they do differ is in how tax is levied on larger pension pots – you used to be charged 55% on anything over the limit if you accessed it as a lump sum and 25% if you took the benefit as income – this is no longer the case – any benefits accessed over the LSDBA amount are charged at your marginal rate of income tax.
Under the old scheme you could defer Lifetime Allowance Assessment on your pension pot until age 75 (as long as you hadn’t accessed your pot), but the Lifetime Allowance Assessment has now been abolished altogether.
Need help navigating the new pension rules?
The changes to the Lifetime Allowance rules have left those with larger pension pots unsure about what they can and can’t access tax-free. If you’re uncertain how these new allowances affect your retirement plans, now’s the time to get tailored advice.
Speak to Simon Garber, our pension and retirement investment specialist, for straightforward guidance that’s personal to you.
