As you may well be aware, in the Spring 2023 Budget, the Chancellor of the Exchequer announced the abolition of the Lifetime Allowance. Unfortunately, however, this headline is somewhat misleading as the LTA has not so much been abolished but has instead been replaced with new allowances. In this article we explore these new allowances.

Old rules

Before we dive into the changes, let’s establish what the Lifetime Allowance actually was.

The LTA was the maximum amount of pension savings an individual could amass over their lifetime without incurring additional tax charges. This included the combined value of all their pension arrangements, such as workplace pensions, personal pensions, and any pension benefits accrued from defined benefit schemes.

Under the old Lifetime Allowance rules, pensions were tested against the Lifetime Allowance at ‘benefit crystallisation events’ (BCEs) – these events were generally when pension benefits came into payment and at age 75. The value of these benefits tested at each BCE would use up some or possibly all of the available LTA.

If at a BCE you were in excess of the LTA, then a tax charge would apply.

The maximum tax-free lump sum you could take from a pension was limited to the lower of 25% of your pension fund or 25% of your remaining Lifetime Allowance.

New rules

From 6 April 2024, the government has removed the Lifetime Allowance and has replaced this with two new allowances, which are:

1. Lump Sum Allowance (LSA) – set at £268,275, however, could be higher should you have any LTA protection in place.

The amounts that will be tested against the LSA are:

-       Pension Commencement Lump Sums (PCLS)

-       Standalone Lump Sums

-       The tax-free element of uncrystallised funds pension lump sum (UFPLS)

1. Lump Sum Death Benefit Allowance (LSDBA) – The standard LSDBA is £1,073,100 for those who don’t have transitional protection or enhancements and is the total tax-free elements of lump sums that can be paid to or in respect of a member.

This allowance is used up by payment of a PCLS, the tax-free element of a UFPLS, as well as the tax-free elements of serious ill health lump sums and lump sum death benefits.

What is tested against these new allowances?

The fundamental difference with the post-abolition pension benefits regime under the LSA and LSDBA is that only lump payments will be tested against limits. There is no testing of pension benefits like drawdown, scheme pensions and annuities.

The old benefit crystallisation events have been replaced with Relevant Benefit Crystallisation Events (RBCEs).

All RBCEs are lump sum payments:

• Relevant Lump Sums – payments made in the individual’s lifetime, such as UFPLS or PCLS.
• Relevant Lump Sum Death Benefits – payments made after the member has died.

At each RBCE the lump sum payments are assessed against the individual’s available LSA and/or LSDBA to determine what amount of the lump sum may be paid tax-free. 

If you have already used up some of your Lifetime Allowance, this will reduce your LSA and LSDBA.

But what do these changes actually mean for you?

Ultimately, no one person’s situation is the same and there are a lot of considerations to take into account when accessing a pension.

Before accessing a pension, we strongly recommend you seek advice if any of the following applies to you:

• Did you take any pensions before 6 April 2024?
• Do you have any Lifetime Allowance protection in place?
• Did you receive pension assets via a divorce?
• Does your pension provider allow your beneficiaries to purchase an annuity with them or allow beneficiary drawdown? If the scheme does not offer this and your beneficiary takes this as a lump sum, it could be that they pay unnecessary tax.
• Do you have any pensions under £30,000? It could be that these pension assets don’t have to be tested against the new allowances.

It could be there is something you can do to increase your allowances or to use up less of your allowances. On the other hand, it could be that if you apply for a new allowance, you are worse off.

Furthermore, continuing to draw on your pension could mean that you are unable to increase your LSA.

Ultimately the new allowances aren’t straightforward and there are a lot of considerations to make when trying to establish whether you are anywhere near either of the allowances. As such, individuals should speak to a qualified independent financial adviser to find out what these changes actually mean for them.

It’s worth also noting that the legislation is likely to see further amendments with HMRC admitting in recent newsletters that the legislation isn’t perfect.

If you have any concerns regarding the new LSA or LSDBA and would like to speak to an adviser regarding this, then please do not hesitate to contact us.