Techzone

The Spring Budget certainly sprung a surprise when Jeremy Hunt announced that the lifetime allowance (LTA) is to be abolished. An increase to £1.8m had been strongly rumoured in the days leading up to the Budget, but scrapping it altogether is a welcome simplification for advisers and their high earning clients. In most cases it will make decisions on how to save for retirement, and ultimately how and when to take benefits in the best way, much easier.

However, it has sparked a number of questions on how it may affect existing pension savings, particularly those involving protections.

It's not possible to answer all of these questions until the Finance Bill is published on 23 March. Obviously, clients will be keen to adapt their future planning according to the new rules. In advance of the Finance Bill next week, the following addresses what we know, and what is yet to be confirmed.

What do we know from the Spring Budget?

The current LTA of £1,073,100 will be abolished from 6 April 2024. In 2023/24, LTA checks still need to be done, but if the allowance is exceeded there won’t be an LTA charge. Effectively, the excess will be charged at 0%.

There has always been the ability for an individual to take some of their pension benefits as a tax free lump sum (the pension commencement lump sum), with a general limit of 25% of the amount crystallised, up to a maximum of 25% of the available LTA. Without an ongoing LTA, the current maximum of tax free cash (TFC) of £268,275 (25% of £1,073,100) will be frozen, with no suggestion of any future indexation.

Since pensions simplification in 2006, there have been a number of protections available to maintain TFC rights where individuals, before then, had either the right to a larger amount of TFC than was allowed under the simplified regime, or had lump sum rights in a scheme of more than 25%. These protections are to continue.

People who have any of the fixed protections may have rights to TFC greater than £268,275 as their limit would be 25% of their benefits up to a maximum of 25% their protected LTA. HMRC have confirmed that anyone with a fixed protection, or enhanced protection, in place as at 15 March 2023 will be able to accrue new benefits from 6 April 2023 without losing their existing protected tax free cash amount.

Individual protection could also allow a higher TFC amount, but this has not been specifically mentioned in any documentation so far. For confirmation that those with either of the individual protections will also retain higher TFC rights, we'll have to wait for the detail in the Finance Bill.

What does this mean for…

Funding - From 6 April 2023, people who had stopped contributing because of being close to, or over the LTA, or who had a form of protection that stopped them paying in, will be able to recommence funding using the increased £60,000 annual allowance without the worry of incurring an LTA charge. And of course if they haven’t been funding in recent years they will also have unused annual allowance which they could carry-forward.

It also means that those with enhanced or fixed protection will be able to join new schemes from 6 April 2023, including in auto-enrolment schemes and death-in-service arrangements, which they might have been excluded from before.

Those that had stopped contributing could start paying in immediately this side of the tax year end, though anyone with enhanced or fixed protection would risk losing their protection - which might include the TFC protection - and any LTA test triggered before 6 April 2023, such as settling death benefits, could still incur a charge based on the current LTA.

Individuals who have already used 100% of their LTA will also be able to recommence funding, although it's unlikely that this will generate any rights to more TFC. Again, we'll have to wait and see.

Transfers - HMRC have confirmed that people with enhanced or fixed protection, valid on 15 March 2023, will be able to transfer from 6 April 2023 without losing their protection. This would allow people with existing fixed protection to set up a new arrangement to receive a transfer of pension credit rights on divorce. This would also appear to include transfers from DB arrangements where the cash equivalent transfer value (CETV) is above the ‘appropriate limit’, that previously might have broken enhanced protection. This might aid people who had previously only partially transferred benefits to keep within this limit.

Taking benefits - Most obviously, individuals with LTA issues who were considering taking benefits now should look at deferring until 6 April 2023, when the LTA charge will no longer apply. There will unfortunately be cases where deferring can’t happen, such as reaching age 75, which unavoidably means that benefits will be tested in 2022/23 with the LTA and the tax charge in place.

Death benefits - Death before 6 April 2023 might mean that any uncrystallised benefits that are paid out as lump sums, used to buy an annuity, or designated into drawdown before that date will be tested against the current LTA. If DC death benefits are not dealt with within two years from the date of death, then they do avoid being tested against the LTA but will become taxable as income on the beneficiaries under the current rules.

What happens next?

The Finance Bill will be published on 23 March and will include all the draft legislation relating to the changes applicable for the 2023/24 tax year. This will be debated in Parliament before becoming the Finance Act and receiving Royal Ascent. With only three weeks of the current tax year remaining, the new legislation will not be fully enacted until well into the new tax year but will apply retrospectively from 6 April 2023.

In the meantime, HMRC will continue to give updates via their Pension schemes newsletters as information becomes available and, of course, we will keep advisers updated on Techzone as things develop.