Lifetime Allowance still raising concerns – read our take on 2023’s big pension news

As we were preparing our last adviser content for 2023, we began to look back at the main issues that affected SIPPs this year.

We didn’t have to look far beyond the Budget in March, which saw four major announcements:

• An increase in the Annual Allowance to £60,000
• An increase in the Money Purchase Annual Allowance to £10,000
• An increase in the minimum Tapered Annual Allowance to £10,000
• The removal of the Lifetime Allowance… kind of.

The impact of these first three announcements was fairly straightforward. We covered these in more detail in our March content, which you can revisit.

While these changes were positive for many clients, all the headlines went to the supposed removal of the Lifetime Allowance (LTA). For advisers, clients, and pension providers alike the LTA has been an increasingly complex complication and, when Jeremy Hunt announced that the government were to abolish the LTA from April 2024, not many tears were shed.

No more LTA tests! No more multiple protections from the LTA spanning the previous 17 years! The ability for people with certain types of protection to start contributing again! It almost seemed too good to be true…

…And guess what? It was. Because as always with Budgets, the “devil in the detail” was lurking to spoil the excitement. In actual fact, the LTA wasn’t quite abolished. 

Excitingly, however, with less than five months to go until the LTA is set to be removed, the industry still does not have all the information from the government to know how we are going to deal with the LTA from April onwards.

So, where are we now and what do we know about what is to come?

The LTA tax charge has been removed, not the LTA

Far from removing the LTA, the Budget document revealed that, from 6 April 2023, there would no longer be an LTA charge. While this is good news for clients, this is very different from removing the LTA altogether. 

Pension providers were still required to test all benefits accrued by a client against the standard LTA (which, at the time of the Budget, was £1,073,100). The maximum pension commencement lump sum (PCLS) was still restricted to 25% of this amount (£268,275).

This is what IPM have been doing since the announcement. We have been carrying out all the usual benefit crystallisation events (BCEs) but not applying an LTA charge where an individual’s total benefits exceeded the LTA.

This has also given encouragement to those individuals who had previously been unable to contribute to pension schemes after applying for specific types of LTA protection. With no LTA charge being applied, paying contributions and losing that LTA protection no longer seemed to matter.

LTA confirmed to end in 2024

The Autumn Statement confirmed that the government is pushing ahead with the removal of the LTA from April 2024. This will be legislated in the Autumn Financial Bill 2023.

The document accompanying the Autumn Statement stated:

“The measure will clarify the taxation of lump sums and lump sum death benefits, and the application of protections, as well as the tax treatment for overseas pensions, transitional arrangements, and reporting requirements. This will take effect from April 6, 2024.”

Many within the industry have voiced concern as to how providers, advisers, and clients are going to familiarise themselves with what a post-LTA world will look like after April, given this is now less than five months away. 

There are likely to be two new limits to get our heads around:

• The Lump Sum Allowance (LSA) – designed to restrict the maximum PCLS an individual is entitled to across all their pension benefits to £268,275 (25% of the LTA as at March 2023)
• The Lump Sum and Death Benefit Allowance (LSDBA) – this is set at £1,073,100 (the LTA as at March 2023) and incorporates the tax-free lump sums that someone may take during their lifetime and what lump sums can be paid in the event of death.

Those individuals who have used their full entitlement to the LTA prior to April 2024 will not have either the LSA or the LSDBA available.

However, concern has been expressed that these allowances will bring in another layer of complexity for those individuals who have some LTA remaining, as there will need to be some form of transitional calculation to work out how much LSA or LSDBA they have left. 

While we await further detail on what these calculations will look like, those individuals who have partially crystalised their entitlement to benefits and have some LTA remaining will need to provide their pension providers with full information on any previous benefits drawn for these calculations to be carried out.

Complexity remains

So where does all this leave us? 

Some believe that we’re not much better off than we were before. The announcement from Jeremy Hunt that the LTA was to be abolished grabbed all the headlines. 

However, when the dust settles, it feels like the LTA has simply been replaced with more complexity thanks to the unintended consequences of a move that was meant to encourage people to keep saving into their pensions.

Get in touch

If you want to have a chat about the potential of SIPPs for your clients, or any other aspects of pension planning, please contact us. Email info@ipm-pensions.co.uk or call 01438 747151.