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Abolishing the LTA – Future Planning Opportunities



The Lifetime Allowance – the amount of pension savings that one can accrue over one’s lifetime - is set to be eradicated. The Finance Act (No. 2) 2023 proposes to fully abolish the charge that is assessed when the allowance is exceeded. It stands at £1,073,100 for the tax year 2023/24.

This is great news for those of you that may have stopped funding pensions due to concerns over busting the LTA. This, combined with the increase in the Annual Allowance (the amount that one can contribute each year and obtain tax relief) to £60,000 meaning a further potential £8,000 of tax-relief for Higher Rate Taxpayers (and £9,000 for Additional Rate Payers) presents significant, new planning opportunities. Also, any Fixed Protections remain in situ if they were established prior to 15 March 2023 and were not lost by 05 April 2023.

The Annual Allowance for those that have accessed benefits flexibly also rises from £4,000 (gross) to £10,000 (gross). Whereas you might not have been minded to continue pension funding due to the limited tax benefits, this could become a serious consideration now that the allowance has risen.

The Tapered Annual Allowance does not now kick in until the adjusted income threshold of £260,000 is met, which is also a boon for savers.

The table below shows the power of the tax efficiencies of pension saving.

(Source: abrdn. Results are based on a single £1,000 gross contribution into a pension).

This sounds positive, overall, but there are some limitations to the proposals. The amount of Tax-Free Cash (or Pension Commencement Lump Sum as it is technically known) will be frozen at £268,275 (which is 25% of the current Lifetime Allowance in case you were wondering why such an odd number).

Pension savings inherited on death before age 75 are totally free of tax. This could be an excellent resource for the transfer of wealth outside of any IHT-liable plans. After age 75 they are taxed at the beneficiary’s marginal rate – but this could be well below the marginal rate of the member.

 

To read about these changes, further, please visit:

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