Big changes are on the horizon for pensions. From 6 April 2024, the Lifetime Allowance will be scrapped entirely, making way for fresh rules.
George Square’s team of expert financial advisers provides an overview of the imminent changes to the Lifetime Allowance.
April 2023 changes
Last year, alterations were made to ease the burden on pension savers. The Lifetime Allowance (LTA) charge was axed, and lump sum payments are now taxed based on your income tax rate. Those with existing protections can rest assured that their safeguards remain intact.
April 2024 - the LTA abolished
Come 6 April 2024, the LTA will be abolished, making room for two new allowances: the Lump Sum Allowance (LSA) and the Lump Sum Death Benefit Allowance (LSDBA).
The LSA caps tax-free lump sum withdrawals, with deductions made for certain lump sum events like pension commencement and standalone lump sums. On the other hand, the LSDBA replaces the LTA for death benefits, set at the same level as the 2023/2024 LTA limit. Individuals with existing protections will see their LSDBA aligned with their protection level.
Lump Sum Allowance (LSA): in detail
The standard LSA is £268,275, but for those with Lifetime Allowance (LTA) protections, it is based on your protected LTA.
The LSA applies at a relevant benefit crystallisation event, which is when tax-free benefits are taken. A relevant benefit crystallisation event in relation to an individual is defined as the individual becoming entitled to:
- a pension commencement lump sum, or
- an uncrystallised funds pension lump sum
Any amount of pension commencement lump sum or the untaxed part of an uncrystallised funds pension lump sum is deducted from the £268,275 allowance. The remaining amount, the income part, is taxed at the individual’s marginal rate of income tax.
Lump Sum Death Benefit Allowance (LSDBA): in detail
Set at the same level as the 2023/2024 LTA limit of £1,073,100, the LSDBA applies at a relevant benefit crystallisation event, when someone dies or on the payment of a serious ill-health lump sum. It is important to remember most tax-free benefits paid during the individual’s lifetime are also deducted from this allowance.
For the LSDBA, a relevant benefit crystallisation event in relation to an individual is defined as:
- the individual becoming entitled to a relevant lump sum, or
- a person being paid a relevant lump sum death benefit in respect of the individual
Here, a relevant lump sum is defined as:
- a pension commencement lump sum
- a serious ill-health lump sum, or
- an uncrystallised funds pension lump sum
A relevant lump sum death benefit means any authorised tax-free lump sum death benefit other than a charity lump sum death benefit, or a trivial commutation lump sum death benefit.
Who will be affected by the changes?
If you’re receiving lump sum payments or death benefits from pension schemes, or if you have or seek LTA protections, these changes concern you. Scheme administrators must adapt procedures accordingly.
For professional guidance on how to make the most of these allowances, please get in touch with the friendly team at George Square.