Lifetime Allowance – goodbye for now?

The Lifetime Allowance (LTA), introduced in 2006, was a capital limit on tax-efficient pension saving. This limit, £1,073,100 in 2022/23, was applied to the total value of all pension savings held across all UK pensions and providers, excluding the State Pension. This meant an individual could build pension benefits that exceed £1,073,100 but these would be subject to a ‘Lifetime Allowance Charge’. This charge created an effective 55% tax on benefits above the Lifetime Allowance.

The Lifetime Allowance tax charge has not been applied for nearly a year now – paving the way for further contributions into registered pension schemes or the re-emergence of registered group life assurance schemes. 

What possible issues are there now that the Lifetime Allowance is about to be removed from 6 April 2024?

The possibility of re-introduction

Perhaps fuelled by Labour’s statements following the removal of the Lifetime Allowance being announced for the first time by Jeremy Hunt in the 2023 Budget (Source: UK Parliament), almost three quarters of people expected it to be reintroduced in the future (Source: A J Bell). From an advice perspective, a survey conducted by UK financial institution Standard Life shows over two thirds of UK advisers thought it would be risky for people to plan on the Lifetime Allowance being removed long term (Source: Standard Life).

In the past, whenever changes down in LTA levels have taken place, various protections have been available, to protect people against tax charges. Our assumption is that this would be the case again. This is not guaranteed – and exactly how it could work is not certain. We could see a repeat of complicated “anti-forestalling” rules put in place to stop individuals investing large sums into pensions whilst the new laws slowly work their way through the royal assent process.

We would suggest individual financial advice is taken here in any case.

The unintended consequences of paying more in

Some individuals previously applied for protection against the LTA, and have not been paying more in, as they did not want to see this revoked (you can lose enhanced protection or any time of fixed protection if you pay in more (Source: Gov UK)).

There is a risk that individuals simply focus on the “removal of the Lifetime Allowance” point and start paying in again (maybe assuming that they need to do this quickly before a possible change of policy in the event of a change in Government), which would see any protection revoked.

Currently, individuals can access 25% of their pension fund tax free, capped at £268,275. If someone has a higher allowance through Fixed Protection, they could have a maximum of £312,500, £375,000 or £450,000. Quantifying what this could mean for a higher rate taxpayer, that decision could cost them £17,690, £42,690 or £72,690 through income tax.

A rush to make decisions on taking benefits

Will there be a rush to retire pre-election?

Should individuals feel that the Lifetime Allowance is to come back into force, then they might make decisions on taking benefits when they may not otherwise have done so. For example, people who are considering retirement at some point in the next few years may look to “crystallise” their fund (i.e. take benefits) sooner, rather than before an election.

This could mean that they are making decisions driven by what they think could happen from a policy perspective – rather than simply what is best for them.

What should businesses do?

Making predictions on what Governments will do, and which Government will be making decisions is not easy.

The most sensible course of action here is to help pension scheme members understand properly what is in place at the moment, what the implications of making changes could be, and highlighting the need for individual financial advice at certain stages.        

For businesses considering a move from excepted to registered group life assurance schemes, consider how any future change to the LTA rules or allowances may affect employees, whilst being mindful of the potential periodic tax charges applicable to the excepted trust.

We have experience in providing allowance focused consulting services across pension and life assurance schemes - please let us know if you would like to talk this through.