INVESTMENTS & PENSIONS
A LOOK AT THE ABOLITION OF THE LIFETIME ALLOWANCE , WHAT IT MEANS NOW AND FROM APRIL 2024 ONWARDS .
The lifetime allowance is now abolished and a new regime introduced in its place from 6 April 2024 . The three new allowances that the former allowance has been replaced with restrict lump sums , lump sum death benefits and overseas transfers , which means that any level of retirement funds can be used to provide a pension income ( e . g . flexiaccess drawdown or annuity ) without incurring a specific tax charge under the lifetime pension limits . The pension income received , however , will be subject to marginal rate income tax in the usual way .
This is in keeping with the stated aim of abolishing the lifetime allowance to ‘ incentivise those currently considering retirement to remain in employment , and to encourage those who have already left the workforce to return .’
THE NEW LIMITS FROM 2024-25
The new allowances that apply from 6 April 2024 are the Lump Sum Allowance ( LSA ), the Lump Sum and Death Benefit Allowance ( LSDBA ) and the Overseas Transfer Allowance ( OTA ). The LSA and the LSDBA will restrict tax-free cash ( and similar payments ), certain lifetime lump sums and lump sum death benefits . Benefits crystallised before 6 April 2024 will reduce the allowances in accordance with a ‘ transitional calculation .’ Where 100 % of the lifetime allowance had been used up before 6 April 2024 the allowances will be nil .
THE LUMP SUM ALLOWANCE
The lump sum allowance ( or LSA ) will cap taxfree cash at £ 268,275 , unless lifetime allowance protection was in place , in which case a higher protected amount will apply . Benefit crystallisation events ( BCEs ) were abolished from 6 April 2024 and replaced with new relevant benefit crystallisation events ( RBCEs ). It is the new RBCEs that will reduce the LSA .
An RBCE occurs when one of the following relevant lump sums is paid :
• A Pension Commencement Lump Sum
• An Uncrystallised Funds Pension Lump Sum ( UFPLS )
• A Stand-Alone Lump Sum .
Only the tax-free part reduces the LSA , which means only 25 % of any UFPLS . Small pots payments are not RBCEs and do not require any available allowance .
Some familiar concepts will be carried forward by the new legislation . For example , where a scheme member receives scheme-specific tax-free cash greater than 25 % of the fund , the LSA will not be reduced by the actual amount of tax-free cash received , but instead by 25 % of the total value of benefits crystallising . The legislation required to achieve this tax treatment is to be amended as per question 13 of Pension Schemes Newsletter 157 .
The new concept of a Pension Commencement Excess Lump Sum ( PCELS ) will also be introduced , which will allow the excess above the LSA to be taken as a lump sum , subject to marginal rate income tax . A PCELS is equivalent to a lifetime allowance excess lump sum .
THE LUMP SUM AND DEATH BENEFIT ALLOWANCE
The lump sum and death benefit allowance ( or LSDBA ) will be set at £ 1,073,100 . Again , if lifetime allowance protection had been applied for , the higher protected amount will apply .
The LSDBA will be reduced by anything that reduces the LSA , Serious Ill Health Lump Sums ( SIHLSs ) and certain lump sum death benefits . This means tax-free cash reduces both the LSA and the LSDBA but the latter is also reduced by lump sum death benefits , such as a lump sum death benefit paid from uncrystallised funds .
Individuals will have no tax to pay provided that the total value of relevant lump sums and lump sum death benefits does not exceed the LSDBA . Where it is exceeded the member or beneficiary will have to pay marginal rate income tax on the excess .
And it is only lump sum death benefits paid following the member ’ s death under age 75 will count towards the lump sum limit , with any excess taxable at the beneficiary ’ s marginal rate .
24 |