The pensions industry is still reeling from the shock spring Budget announcement that the lifetime allowance will be completely abolished from April 2024.
We now have to understand how the rules are changing in this tax year, but also have one eye on the future and what the change could look like next year. Understanding this will be critical to establishing what this means for clients who are near or over the LTA and who plan to take benefits soon.
However, this is not an easy task, and it is complicated further by two important points.
First, although we know how the rules are changing this year, we do not know what the changes will be next year.
From April 6 2023, there will be no LTA tax charges. However, scheme administrators still have to carry out benefit crystallisation events and measure the LTA used. And this means continuing to ask clients for previous usage and details of any protection held, however nonsensical that may seem.
We also know any excess over the LTA taken as a lump sum will not face a LTA tax charge but will be subject to income tax. And finally, we know those with a protected LTA get to keep any pension commencement lump sum protection and can even re-start contributions if they have enhanced or fixed protection.
But we do not yet know what the April 2024 changes look like. HMRC has told us there will be a maximum PCLS of £268,275 and the LTA will be abolished. This could be achieved simply by ‘rubbing out’ any mention of the LTA in the legislation and adding in checks on PCLS taken.
Or HMRC could roll up its sleeves and completely dismantle the whole framework, possibly disconnecting the need to secure income at the same time as taking tax-free cash.
Uncertain future for LTA
Our second challenge is the waters have been further muddied by the Labour party’s staunch reply that they will reverse the removal of the LTA.
Until we see the next stage of draft legislation it will be very hard to judge whether Labour’s intentions are possible in practice.
If we are talking about a wholesale legislative change before the next election, Labour will find it very hard to put it all back together. Instead, it may decide to make other changes, such as lowering the annual allowance, cutting the tax-free cash limit, or looking at charges on death benefits.
In the meantime, financial advisers need to work with their clients who have amassed pension funds above the lifetime allowance and decide a course of action. My instinct is it is too early to make any firm plans as we simply do not know the detail at this stage.
