The Pension Lifetime Allowance & Beneficiary Drawdown – What Are They & What’s Changing

What is the Pension Lifetime Allowance (LTA) and what are the changes that are being made to it?

The lifetime allowance is the total amount of pension benefits you can build up in your lifetime before you need to pay a lifetime allowance charge. It applies to all your personal and workplace pensions but not your State Pension or any overseas pensions. The original limit was set at £1.5 million. The LTA was later raised to £1.8 million and then reduced incrementally to its most recent level of £1,073,100 for the tax year 2023/24. Historically, when you started to take your pension benefits you would have paid a lifetime allowance charge on any pension savings taken over this amount.

In the Budget on 15 March 2023, the Government announced that they planned to make several changes to the pension annual allowance, lifetime allowance, and tax-free cash entitlement.

This was followed in July 2023 when HMRC issued a policy paper and draft legislation (The Finance (No. 2) Act 2023) where the LTA Tax Charge on pension savings in excess of the LTA was removed. This means that, if you take your pension benefits for the tax year 2023/24 or any subsequent tax year and they are in excess of the LTA, no pension lifetime allowance charge arises. However, the maximum tax-free cash you are allowed to take from your pension funds will be frozen at £268,275 from 6 April 2024 and the lump sum and death benefit allowance is set at £1,073,100.

Any lump sums paid above this level will be taxed at the individual’s or beneficiaries’ marginal rate of income tax. Unlike the lifetime allowance, these limits will apply only to lump sums paid by pension schemes. It won’t apply to the payment of pension income.

What potential changes may be coming for beneficiary drawdown? 

You might have read about potential changes to the taxation of beneficiary drawdown and annuities. The policy paper published with the draft legislation mentioned that, from 6 April 2024, death benefits that would have been tested under the following benefit crystallisation events will no longer be excluded from marginal rate income tax if the member dies under age 75.

This would be a major change as currently, individuals can pass their pension benefits to their beneficiary’s income tax-free if they die under the age of 75. Post-age 75, these benefits are subject to income tax at the recipient’s marginal rate of tax.

However, the potential change to the taxation of the pre-age 75 beneficiary drawdown was not covered in the published draft legislation. Instead, HMRC is in consultation and seeking responses from the pensions industry before any changes are implemented. The consultation closes on 12 September 2023, so the proposed changes are in no way definite.

It’s important to note that any change to the taxation of beneficiaries’ drawdown or annuities would need further draft legislation.

Comment

As you can see the UK pensions systems and regulations are incredibly complex and ever-changing.  Everyone is unique and so are their retirement objectives and therefore seeking professional advice in this area is important to help you realise your individual retirement or investment goals.