Lifetime Allowance Planning
As of April 2024, there have been significant changes to the pension lifetime allowance (LTA) rules in the UK.
Here are the key updates:
Abolishment of the Lifetime Allowance
The Lifetime Allowance charge has been completely abolished, meaning that there is no longer a cap on the total amount of pension savings that can be accumulated without facing a tax penalty.
Annual Allowance
The standard annual allowance, which is the maximum amount you can contribute to your pension each year with tax relief, remains at £60,000. However, contributions beyond this limit will still be subject to an annual allowance charge.
Money Purchase Annual Allowance (MPAA):
For those who have accessed their pension pots, the MPAA, which limits future tax-relieved contributions, stays at £10,000.
Tapered Annual Allowance:
High earners may still be affected by the tapered annual allowance, which reduces the annual allowance for individuals with adjusted incomes over £240,000. This can reduce the annual allowance to as low as £4,000.
No Lifetime Allowance Tests:
Pension funds will no longer be tested against the LTA when benefits are taken from the pension or at age 75.
These changes are intended to simplify the pension system and encourage greater savings into pensions without the constraint of a lifetime limit. However, while the LTA has been abolished, other pension tax rules and limits still apply. It is always advisable to consult with a financial adviser from Markland Hill Wealth to understand how these changes impact individual pension planning.
One of the tax rules that has received most press given this change in legislation is the amount you can now take from your pension tax free if you are at or over the previous lifetime allowance limit. We have a new set of rules referee to as ‘Transitional tax-free cash’.
Transitional tax-free cash rules refer to the specific conditions under which individuals can access tax-free cash amounts higher than the standard limit due to protections they hold from previous pension rules.
After LTA Abolition in April 2024 the following rules now apply:
Capped Tax-Free Cash
Despite the abolition of the LTA, the tax-free cash amount will still be capped at £268,275 (25% of the previous LTA of £1,073,100) unless you have one of the above protections.
Protected Amounts
If you have a valid protection that allows for a higher tax-free cash amount, you will retain the right to withdraw the higher amount even after the LTA is abolished.
Key Considerations following the LTA abolition:
Review Protections
It’s essential to review your protections and ensure compliance with their conditions to maintain your higher tax-free cash entitlement.
Future Changes
Stay informed about any future changes or clarifications from HMRC, as the pension rules can evolve, impacting the details of these protections.
By understanding these legislation changes, transitional rules and protections you can maximize your tax-free cash entitlement and make the most of your pension savings. We recommend a pension review at your earliest convenience if you feel this legislation will affect your personal retirement situation.