What is the Lifetime Allowance and When will it Expire?
Until the Spring Budget announcement, the LTA was the maximum amount that you could save into a pension fund without having to pay an additional tax charge.
The LTA currently stands at £1,073,100 but was reduced from £1.8m in 2012, before being frozen by the then Chancellor Rishi Sunak with this lower figure due to remain until 2026 with the LTA charge being removed from 6 April 2023 and before being abolished altogether in a future Finance Bill.
It is expected that the measures announced will lower the barriers to remaining in work in retirement and further simplify the tax system by taking thousands out of the complexity of lifetime allowance Charges.
Some Key Considerations for Your Pension Planning
Any fiscal policy change can have a differing impact on each and every one of us and long-term pension planning is certainly no exception. Here are a few considerations that you should take into consideration:
- Is there anything I can do if I already have fixed protection? If you have maintained your LTA at a particular level with a fixed protection, the restarting of contributions may appear less straightforward. If you are looking to make further contributions in the 2022/23 tax year then this will mean that you will lose your fixed protection. This will reduce the amount of money you can draw tax-free from your pension to the standard levels.
- If you halted your pension contributions in fear of breaching the £1,073,100 allowance, should you restart your contributions? If the answer to this is yes, well you may want to reconsider making some additional tax-efficient contributions to your pension pot. In addition, you may be able to carry forward your unused allowance(s) from the previous three years at the existing £40,000 pension allowance until April 5 of this year. The increase in the annual allowance from £40,000 to £60,000 for the tax year 2023/24 also means that in future years you could be putting more away for your retirement tax efficiently.
- Should I be thinking beyond pensions as the only retirement provision? Although the abolition of the LTA makes pensions may more attractive, there may be other investment strategies that could better suit your needs such as ISAs and other investment vehicles.
- Should I reconsider my inheritance tax plans? When you pass away, pensions are treated as a separate entity to your estate and IHT. Depending on your circumstances, building up your pension could play a part in your estate planning strategy. IHT is notoriously complex so we would always suggest you take professional advice.
- Can I still take my tax-free lump pension sum? It is possible to build a larger pot without incurring an LTA charge and whilst the tax-free sum has been capped at £268,275, this may impact the timing of your drawdown decision making.