Understanding how the various pension allowances work, and how to use them as efficiently as possible, can help your clients maximise their retirement savings. Ultimately, this means that they can achieve their savings goals and secure the lifestyle they want in retirement.
The 2023 spring Budget contained several notable pension changes that may affect your clients. Most notably, the Lifetime Allowance (LTA) tax charge has been removed and there are plans to completely abolish the LTA in a future Finance Bill.
This could be great news for your clients and so it is important that they understand how the change affects them so they can take full advantage.
The Lifetime Allowance limited the amount of tax-efficient pension savings an individual could accrue
The LTA represented the upper limit of what your clients could accrue in their pensions across their lifetime without paying an additional tax charge. In the 2022/2023 tax year, this was £1,073,100.
Any withdrawals above this amount were usually subject to a 55% tax charge if taken as a lump sum, or a 25% charge if taken as income.
However, on 6 April 2023, the chancellor removed the LTA tax charge and announced plans to abolish the LTA altogether in April 2024. Effectively, this means that the LTA will no longer affect your clients.
This could benefit them in three important ways.
1. Avoid the Lifetime Allowance tax charge
The reforms to the LTA mean that your clients no longer have to worry about triggering a tax charge when their total pension fund exceeds £1,073,100 and they make a withdrawal. This will save them a tax charge of 25% plus Income Tax if the pension is drawn as income or 55% if taken as a lump sum.
It’s important for clients to note the maximum “pension commencement lump sum” they are able to take will be restricted to £268,175 (equivalent to 25% of the most recent LTA).
So, they won’t be able to amass a significant fund and take 25% of it as a tax-free lump sum.
A much larger overall pension pot could mean a much more comfortable retirement, and fewer concerns about running out of money in later life.
2. Potentially benefit from more tax relief
As well as avoiding any tax charges, your clients may also benefit from more tax relief by maximising their pension contributions.
The removal of the LTA tax charge means that your clients can potentially build a much larger fund for retirement. They can continue to benefit from generous tax relief on pension contributions as well as employer contributions and compound returns.
This is especially useful for clients that were previously near to or over the LTA threshold. Clients who had been forced to pause or reduce contributions as they neared the LTA can now continue to make substantial contributions without any further tax concerns.
This could be particularly beneficial for those who also receive matched or generous employer contributions.
Clients need to remember that while there’s now no limit on the total value of tax-efficient pension savings they accrue over their lifetime, annual limits still apply.
The chancellor increased the Annual Allowance in the 2023/24 tax year to £60,000. This means clients can contribute up to £60,000 gross into their pension (or 100% of earnings if lower) and benefit from tax relief on their contributions.
Higher earners and those who have already started to flexibly access their pension may have a lower Annual Allowance and advice could be beneficial.
3. Reduce Inheritance Tax when passing on wealth to your family
One of the most interesting consequences of the LTA reforms could be in the benefits they provide to a client’s estate plan.
In most cases, a pension falls outside of your client’s estate for Inheritance Tax (IHT) purposes when they die. This can help a client to avoid losing 40% of their pension assets to IHT on their passing.
Instead, the recipient of an inherited pension pays no Income Tax if the person died before age 75, or pays Income Tax at their marginal rate if the death is after age 75.
A practical example of this would see a client use assets such as cash savings, ISAs and other investments to sustain their lifestyle in retirement, and only accessing their pension fund as a last resort.
As non-pension assets are usually considered part of an estate for IHT calculations, it could make sense for clients to deplete these assets first, thus reducing the size of their estate, and passing on pension wealth tax-efficiently to the next generation.
Again, this strategy should form part of an overall estate plan and seeking advice is recommended.
Get in touch
If you have clients likely to be affected by the LTA, or clients who would benefit from retirement planning advice, we can help.
To find out how to work more closely with us, please contact email@example.com or call 01904 655 330.
This blog is for general information only and does not constitute advice. 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, tax planning or will writing.
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 results.
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.