Some big news around UK pensions came earlier this year, when the Chancellor of the Exchequer, Jeremy Hunt, delivered his first budget.
While some of what was announced was more or less expected, one very surprising decision has been the removal of the Lifetime Allowance (LTA). As a reminder, the LTA is the maximum limit on tax-deferred pension savings that an individual can access from all pension schemes in the UK.
It was initially projected that the LTA would rise from its current amount of £1,073,100, potentially reaching its previous peak of £1.8 million. Surprisingly, the decision was made to completely eliminate the LTA and this will officially be abolished on April 6, 2024. In anticipation of this, the LTA charge, which is applicable when a member exhausts their LTA or has insufficient remaining, was eliminated on April 6, 2023.
Financial Planning implications
This change is still somewhat fresh but the financial planning impacts could be significant for many people with UK pensions.
The most obvious implications from the LTA removal are:
- Anyone previously unable to make pension contributions, either due to the value of their benefits exceeding the LTA or because they would have lost various LTA protections, can now make contributions without the possibility of an LTA tax charge.
- Anyone in drawdown, who has used their LTA but still has remaining pension funds that have yet to be tested, may be able to draw these benefits now without an additional tax charge.
What should I do?
Discuss with your financial advisor how these changes might impact you before taking any action.
The Labour Party has stated that it will probably reverse these changes if it wins the next general election (which seems like a real possibility as of the date of this post). Therefore, these changes may only apply for a short period of time and each person will have to consider this, as well as their own circumstances, before deciding to take any action in advance of the next UK election.
Anyone now thinking of increasing their pension contributions or accessing their pension benefits before these rules are changed should first seek advice from a qualified financial advisor to ensure any changes can be looked at as part of their own holistic financial plan.