July 2024 LTA changes
Big Changes to Your Pension: Understanding the new Lump Sum Allowance and Lump Sum Death Allowance
The landscape of pension savings in the UK has undergone significant changes and these became effective from the 6th April 2024. With the recent abolition of the Lifetime Allowance (LTA), it’s essential to understand what these changes mean for your retirement planning and how you can benefit from the new rules. In this blog post, we’ll explore the new Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA) which have replaced the LTA.
The End of the Lifetime Allowance (LTA)
The Lifetime Allowance was a limit on the amount of pension savings you could accumulate without facing additional tax charges. From the 2023/2024 tax year, the LTA charge has been removed, and from the 2024/2025 tax year, the LTA itself has been abolished. This change aims to simplify the pension system and offer more flexibility in how you save for retirement.
New Lump Sum Allowances
With the LTA gone, two new allowances have been introduced:
Lump Sum Allowance:
You can take up to 25% of your pension pot as a tax-free lump sum, but this is now capped at a maximum amount of £268,275. This cap was derived from 25% of the old Lifetime Allowance figure, £1,073,100. You may be eligible for a higher lump sum if you have protection in place, such as Fixed Protection, Individual Protection, Primary Protection or Enhanced Protection. Your Lump Sum Allowance (LSA) will be 25% of your protection value. Any amount taken above this cap will be subject to income tax at your marginal rate. An individuals LSA is adjusted to take account of some tax-free amounts that were paid prior to 6th April 2024.
Lump Sum Death Benefit Allowance:
The Lump Sum Death Benefit Allowance (LSDBA) has also been set at the old Lifetime Allowance figure, £1,073,100. As with the LSA, you may be eligible for a higher LSDBA if you have protection in place (referenced above). There are two events when the LSDBA is applicable, that is on serious ill health lump sums or when an individual dies. Under current rules, if an individual were to die before age 75, their beneficiaries would receive the funds that are within the LSDBA, tax-free. If the individual dies post age 75, they would receive the funds within the LSDBA subject to their marginal rate of tax. Tax-free cash payments will reduce an individuals LSDBA and benefits taken prior to 5th April 2024 will also reduce the LSDBA. Any funds above the LSDBA will be taxable at the beneficiary’s marginal rate of income tax, regardless of if the individual died pre or post age 75.
Planning Opportunities
Pensions continue to remain very tax efficient as funds within a pension are outside of your estate, and therefore not subject to potential inheritance taxation.
In some cases, individuals who took benefits prior to 6th April 2024 may not have received the full Lump Sum Allowance on their benefits. An example of this is where an individual may have taken a final salary pension with low tax-free cash and high income, using up a high proportion of their Lifetime Allowance but a low reflected tax-free sum. These individuals may benefit from requesting a transitional tax-free amount certificate to give them increased tax-free cash amounts, up to their total LSA. It is important to seek advice on this point, as applying for a certificate can result in a worsened financial position.
