Autumn Statement 2023 - the abolition of the LTA
Alongside the Treasury documents, HMRC published some further details on the new pensions regime for 2024/25, where the lifetime allowance (LTA) will be completely abolished, and two new allowances come into play – the lump sum allowance and the lump sum & death benefit allowance.
Pension death benefits
In a previous policy document, there had been mention that on the death of the member, DC funds used by beneficiaries to go into drawdown or to buy an annuity would be taxable – however, that decision has been reversed and the current basis, where the income would be tax-free for the beneficiary where the member died under age 75, will continue.
Triviality and small pots
In another change of stance, the tax-free element of trivial commutation lump sums, winding-up lump sums, and small pot commutations will not reduce the new allowances, though you will need allowance available in order to take these lump sums.
Scheme-specific tax-free cash protection
Taking scheme-specific tax-free cash (from schemes where the member has an entitlement to more than 25% tax-free cash available back at A-Day) will only reduce the allowances by 25% of the total amount vesting (i.e. 25% of the lump sum and associated pension) rather than the full amount of the tax-free lump sum. This ensures those with this protection are not worse off under the new regime.
New type of taxable lump sum
The lifetime allowance excess lump sum, where money taken over the LTA as a lump sum less the 55% LTA charge will be abolished, but there will be a new lump sum introduced – the pensions commencement excess lump sum, which will be taxed at the individual’s marginal rate. This is expected to be used under schemes that provide a right under their rules to a level of tax-free cash greater than the member’s available lump sum allowance.
LTA enhancements and BCEs
Individuals with LTA enhancement factors will retain their rights to higher tax-free element of any serious ill-health lump sums and lump sum death benefits, where entitlement to the enhancement arose before 6 April 2024.
From 6 April 2024, the LTA will no longer apply, and the old benefit crystallisation events (BCEs) will be removed and replaced with relevant benefit crystallisation events (RBCEs) which will cover the payment of relevant lump sums and lump sum death benefits.
Transfers overseas
While the LTA will be abolished, for transfers from a UK scheme to a QROPS, uncrystallised funds will be tested against a new overseas transfer allowance, which will be set at the same level as the individual’s lump sum and death benefit allowance. If the transfer overseas exceeds this, the excess will be chargeable.
Availability of the new allowances
There will be a transitional calculation for those who have taken benefits before 6 April 2024, to work out how that will affect the new allowances.
Full details are not yet provided, but members with accurate records of previous tax-free amounts taken will be able to use that information as an alternative transitional calculation.
Individuals who have already used up 100% of their LTA will have exhausted their allowances.
All these measures will be contained in the Autumn Finance Bill 2023.
Disclaimer: Any reference to legislation and tax is based on Journey Invest Limited’s understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.