Will the change to the Lifetime Allowance affect how you take pension benefits going forward? Could the change be reversed in the near future? Samantha Kaye from Wellesley investigates
The way we retire has shifted radically over the past decade, and another major change is set to impact high earners. One of the headline announcements of the Spring Budget in March 2023 was the Lifetime Allowance (LTA) and the potential abolition for the 2024/25 tax year – the cap on the total value that you could hold in your pensions without facing a tax penalty.
It currently stands at £1,073,100, but it will be removed from April 2024. The change will mostly affect senior professionals like doctors and head teachers, who might have previously been tempted to take early retirement or opt out of pension saving.
Although the move has been lauded for simplifying the pension system and promoting greater awareness of saving for the future, industry experts are sceptical. HMRC has yet to show how the LTA could work in practice. What’s more, with a General Election looming, Labour has pledged to reverse any changes if they come into power, in favour of a solution for NHS staff only.
Investors have therefore been left with a number of tricky questions. What should you do if you previously paused your pension contributions to avoid breaching the LTA? Should you crystallise funds in excess of the LTA now while there’s no tax charge? Or could this leave you vulnerable to tax in the future if the LTA is reinstated by Labour or a future government? What does it all mean for Inheritance Tax (IHT) planning, given that you can pass pensions to beneficiaries IHT-free upon your death?
Assessing your position
Any questions arising from the proposed LTA changes will typically require professional advice on any actions you might need to take to secure your short- and long-term financial well-being. Immediate things to consider are:
1. Are you using a mix of tax-planning tools to save for your future – including pensions and ISAs?
2. Check your pension nomination – who does it pass to when you die?
3. If you’ve previously been affected by the LTA, it’s worth checking your pension policies and procedures to clarify the details on benefits.
It’s impossible to say today what the future holds, but regular contact with your adviser is the key to ensuring there’s not a knock-on effect on your future plans.