Is abolishing the lifetime allowance going to simplify or complicate pensions?

The lifetime allowance (LTA), the amount that you can build up in your pension savings without incurring a tax charge, will be abolished from the 6 of April 2024. Here, Haydn Barlow, Chartered Financial Planner at Equilibrium Financial Planning, discusses what the new rules mean.

“It was a surprise to many, me included, when the chancellor Jeremy Hunt announced in the 2023 spring budget that the LTA would be abolished. Over the last 20 years, there have been an array of changes to pension legislation which has led to pension complication as opposed to pension simplification.

“Initially, when I heard about the plans to abolish the LTA, I thought we might finally be moving towards simplification. However, a deeper dive into what this means, demonstrated that my hopes were short-lived.

“From April this year, the LTA will be replaced by lump-sum allowances. The first of these is the lump sum allowance (LSA) which will be capped at £268,275 (25% of the current LTA) on the amount of tax-free cash you can draw down from a pension. For the lump sum and death benefit allowance (LSDBA), there will be a cap of £1,073,100 on the amount of tax-free cash and lump sum death benefits payable.

“However, if individuals have the old-style LTA protections in place, they can benefit from higher allowances. Additionally, any benefits taken by way of small pots, trivial commutation (taking all of your pension as a lump sum) or winding up lump sums, will not have an impact on the LSA or LSDBA.

“If people have previously taken pension benefits, there are two possible methods of calculating any remaining allowances: the standard method and the alternative method.

“The alternative method offers potential planning opportunities for individuals who haven’t sacrificed any of their defined benefit pension (a type of workplace pension that pays a retirement income based on salary and the number of years of service) income for a lump sum or haven’t taken any tax-free cash through guaranteed annuity rates.

“However, to benefit from this opportunity, and maximise the LTA, individuals need to have sufficient uncrystallised funds, in other words, pension savings that have not yet been accessed.

“Overall, the introduction of the new rules is more complicated than many may initially think and having a solid understanding of them is key. As such, people may need to seek financial advice in order to navigate them.”