As Jeremy Hunt’s recent Autumn Statement contained 110 growth measures for backing British business, employers could be forgiven for failing to pick up on its announcements relevant to the abolition of the pensions Lifetime Allowance (LTA).
Indeed, the fact that clients haven’t been asking us about the latter pretty much confirms that they have so far gone under the radar.
But this highlights the importance of having a specialist intermediary to keep you informed about such developments. Pensions regulations are forever changing, and it is essential to have a point of contact to guide you through the maze.
The LTA, which currently stands at £1,073,100, represented the limit on the total value of pensions benefits an individual could build up tax-efficiently during their lifetime. Amounts above it taken as a lump sum were subject to 55% tax charge.
An archaic link between life and pensions, which no longer serves any useful purpose, also meant that the death benefits from registered group life schemes counted towards the same LTA and could result in considerable tax liabilities.
But in the March 2023 Budget — primarily to save the NHS from doctors retiring early — it was announced that the tax charge would cease to exist from 6th April 2023 and that the LTA would be removed altogether in April 2024.
The draft legislation issued in July 2023 then revealed that in April 2024 a new Lump Sum Allowance was to be introduced at 25% of the current LTA (equating to £268,275). There was also to be a new tax-free Lump Sum and Death Benefit Allowance set at the same £1,073,100 level as the LTA.
There were, however, commentators who feared that next April’s proposed changes would get kicked into the long grass as the Government increasingly focused on more obvious vote-winning measures in the run-into the next election.
Autumn Statement measures
This could still prove to be the case, but there was nothing to suggest this in the Autumn Statement, which unleashed a string of detail about how the new proposals are due to shape up.
These cover everything from beneficiary flexi-access drawdown, enhanced protection and trivial small pots to lump sum payments from non-UK pension schemes and transitional calculations for those who have taken benefits before April 2024.
Nothing will actually be finalised until the Finance Bill 2023-24 has finished being debated in Parliament, and further amendments cannot be ruled out. So, there is little point in expending too much energy on the current proposals in an area that has been full of twists and turns.
Furthermore, whatever the Government intends, there is a real possibility that the LTA will be reintroduced should Labour get elected.
Expression of wish
The Autumn Statement proposals for beneficiary flexi-access drawdown/annuity to remain tax exempt do, however, warrant at least some immediate action as they reinforce the importance of employers helping to ensure that employees have completed an up-to-date nomination or ‘expression of wish’ form to identify who should receive their pension scheme death benefits.
If no such form exists, the pension benefit could be paid into the estate as a lump sum – with amounts in excess of the Lump Sum and Death Benefit Allowance being liable to tax.
Even if the proposed LTA changes never actually get introduced, completing the expression of wish form is still important as it enables intended beneficiaries to receive money in only a few days.
But if scheme trustees have to identify the relevant individuals, the process could take months, or even years, and there is a risk these could differ from what the deceased had originally intended.
The form filling only takes minutes, costs nothing and nominations can subsequently be changed simply by completing a fresh form.
If you would like to find out more about how the abolition of the LTA could potentially affect your pension and group life arrangements, then please don’t hesitate to contact us.
The information is correct at the time of writing, but tax regulation is subject to change.
The Financial Conduct Authority does not regulate tax planning. The above is opinion based and does not constitute individual financial advice.