The Chancellor Jeremy Hunt surprised everyone back in March when he announced the abolition of the Lifetime Allowance (LTA), the cap on how much you can contribute to a pension without having to pay an additional tax charge.
Some have also asked me to increase the Lifetime Allowance from its £1 million limit.
But I have decided not to do that.
Instead, I will go further and abolish the Lifetime Allowance altogether.
It’s a pension tax reform that will…
… stop over 80% of NHS doctors from receiving a tax charge.
… incentivise our most experienced and productive workers to stay in work for longer.
… and simplify our tax system, taking thousands of people out of the complexity of pension tax.
You may be aware that he didn’t actually abolish the LTA at all. (Yet. The LTA framework will be removed completely from 2024.) Instead, the tax rate has been amended to zero, whilst at the same time the amount of tax-free cash you can access has been capped at… 25% of the old Lifetime Allowance (£268,275).
This means that for the next year, even if you are retiring with a modest pension fund, you will still have to fill in complicated LTA forms. And you will still be told the percentage of your allowance you have used. (Which will mean absolutely nothing to most people.) You will also still need to keep a record of the LTA you use. Maybe you are cashing in a small pot before you stop work to fund a particular project. Several years later, you will need to have the details on hand when you retire ‘for real’.
It’s also really complicated on death. For example, if someone dies before the age of 75, their pension fund normally transfers to their beneficiaries completely tax free. Unless the value exceeded the LTA (£1,073,100), at which point really complex rules apply.
It’s easy to understand that up to the LTA limit, pre-75, the pension fund remains tax free for beneficiaries. This is a good outcome at what is of course a sad time for the family involved.
With the new arrangement announced by the Chancellor, if the family cashes in any fund over the LTA direct to their bank account, they no longer pay any LTA tax charge. Instead, they will pay income tax at their own marginal rate on the excess above the LTA (a less well-known rule that has been in force a while and remains unchanged).
However, if they transfer the pension fund from the deceased’s policy to a new policy in their own name and then cash it in, they don’t have to pay the income tax charge.
Without seeking advice – which, let’s be honest, very few people do – how would anyone know that?! How would they know that by following a certain procedure, they can perfectly legitimately sidestep a significant tax charge.
Pensions are a great way to save for retirement but despite the Chancellor’s claims of ‘simplifying our tax system’, boy can they be complicated!