What the abolition of the Lifetime Allowance could mean for your long-term financial plan

There’s a lot to think about when planning for your financial future and it may feel overwhelming. And yet, taking the time to consider the retirement income you may need and how you might achieve this, could help you plan for the lifestyle you want.

A key consideration may be how to save and draw on your pension in the most tax-efficient way.

The government pays generous tax relief on pension contributions, making this an attractive way to save. However, until recently, the Lifetime Allowance (LTA) limited the total amount you could build up in pension benefits without incurring an additional tax charge.

Consequently, you might have welcomed the removal of the LTA charge on 6 April 2023, and the news that the LTA will be abolished completely from 6 April 2024.

However, it’s important to understand how these changes could affect your pension savings and withdrawals. So, read on to find out how the abolition of the LTA could impact your long-term financial plans.

How the LTA affects your retirement savings

Before it was removed, the LTA was £1,073,100 – meaning that this was the maximum amount you could accrue in your pension before incurring additional tax charges.

Before 6 April 2023, if you accrued more than this in pension benefits you might have paid an LTA charge on the excess plus Income Tax on any additional income.

As a result, the LTA has been a savings barrier for many people. Research published by Professional Adviser found that 16% of people said they had stopped paying contributions into their pension fund because of fear that they would exceed the LTA[1].

What the Lifetime Allowance change means for your pension savings

It’s important to note that the LTA charge has been removed, but the LTA remains in place until it is officially abolished on 6 April 2024.

So, while pension providers may still check how much you’ve accrued against the LTA, any amount exceeding the allowance may only incur your marginal rate of Income Tax rather than an LTA charge.

The abolition of the LTA could make pensions more attractive to higher earners as a tax-efficient way to save.

Remember, though, that you will only enjoy tax relief on pension contributions within the Annual Allowance, which is £60,000 or 100% of your annual income, if lower, in the 2023/24 tax year.

Despite the removal of the LTA, the maximum tax-free amount you can take from your pension has been frozen at £268,275 (25% of the original LTA). However, if you’ve previously applied for LTA protection, your tax-free lump sum may be higher than this.

So, while the abolition of the LTA means you could accrue a larger pension pot without incurring a potentially hefty tax charge, you’d be wise to monitor your annual contributions and take advice before you start drawing from it.

Your Aspira financial planner will help you understand how much you can withdraw without incurring a heavy tax charge. They will also help you draw up a tax-efficient and sustainable income plan.

How the abolition of the Lifetime Allowance could affect your retirement plan

The abolition of the LTA could affect your long-term financial plans in several ways.

You could resume pension contributions

If you stopped contributing to your pension because you were close to the LTA limit, it might be worth considering resuming payments to continue benefiting from the tax relief available. This could also help to grow your pension pot further and boost your retirement income.

You might choose to “unretire”

If you’ve already stopped working, you might choose to return to work for a period to top up your pension fund from your earnings. You’ll receive government tax relief on your contributions, and you could also benefit from employer contributions.

However, if you’ve already started drawing flexibly from your pension, you may be subject to the Money Purchase Annual Allowance, which reduces your Annual Allowance from £60,000 to £10,000 (2023/24).

You could pass on more of your wealth

A pension is not normally considered part of an estate for Inheritance Tax (IHT) purposes.

So, if you have other assets to draw on in retirement, you could preserve your pension to pass on to your beneficiaries.

You could even continue to contribute to your pension, enjoy the tax relief, and reduce the value of your estate. As a result, your loved ones may have a smaller IHT bill and receive more of your wealth.  

It’s important to note that you’ll still be bound by your Annual Allowance for tax-efficient pension contributions.

Also, your beneficiaries may be liable to pay Income Tax at their marginal rate on any pension fund they inherit if you die after the age of 75. However, your pension will have benefited from years of tax-efficient growth up to this point.

Passing your pension on to your beneficiaries can be highly beneficial, but can also be complex. If this is something you’re interested in doing, it’s wise to speak to your financial planner. They will explain how it will benefit you, your IHT position, and how it could affect your intended beneficiaries.

Get in touch

To find out more about the changes to the Lifetime Allowance and to understand how the new rules apply to you, please email us at info@aspirafp.co.uk or call us on 0800 048 0150.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation for any investment or retirement strategy.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

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[1] https://www.professionaladviser.com/news/4120264/lta-removal-spurring-contributions-retirement-delays