Has the Lifetime Allowance Really Disappeared?

On 6 April 2024 the pension lifetime allowance (LTA) officially disappeared, thanks to 100 pages of technical legislation in the Finance Act 2024 and 20 pages of regulations.

However…

The abolition did not go quite to plan. Two days before the allowance’s demise, HMRC issued a newsletter saying that ‘there would be further minor technical changes made through a second set of regulations’ without specifying when regulatory round two would happen. To the pension cognoscenti the hiccup did not come as a surprise.

From the moment that the Chancellor announced he would abolish the LTA in less than thirteen months, there was considerable scepticism that such an ambitious timetable could be achieved. The LTA first appeared in the Finance Act 2004 as a cornerstone of what at the time was called ‘pensions simplification’ (sic). Over the next two decades the LTA was subject to successive bouts of further legislation, which both amended its terms and built upon it.

In practice…

HMRC’s newsletter says ‘…schemes should ensure that members are aware of the need for further legislative changes. As a result, members may need to wait until the regulations are in place before taking or transferring certain benefits. This is to ensure that their available allowances and tax position do not need to be revisited later in the year.’ Fortunately the ‘certain benefits’ mentioned are a small, esoteric, mix, so if you are drawing benefits or making a transfer, you may not have to wait for the new regulations to arrive.

The long shadow of the LTA remains 

While the letter of the law and regulation is that the LTA is no more, its ghost is still to be found haunting pension legislation. For example:

• The normal maximum total lump sum that you can draw free of tax remains at £268,275. That just happens to be 25% of the old standard LTA of £1,073,100.

• The normal maximum lump sum death benefit that can be paid free of tax on death before age 75 is £1,073,100 – the old LTA again.

• Both lump sum figures may be higher if you have any of the various transitional protections dating back as far as 2006. All those protections revolve around the appropriate LTA at the time they were introduced.

The corollary is that you cannot now forget about any LTA protection you have, even though the LTA has disappeared from the statute books. The advice is the same now as it ever was: if you have any form of protection, do not take any action without first seeking advice.

Has anything really changed?

The end of the LTA has removed the corresponding LTA tax charge of up to 55% that could arise on benefits exceeding the LTA. In many circumstances the lump sum limits outlined above will mean that the same excess will now attract income tax in the hands of the recipient, whether that is you or your beneficiaries.

The net result is that exceeding what was the LTA (plus any transitional uplifts) is less taxing than it once was, but still may be something to avoid. At worst you might find yourself in the situation where you receive less tax relief on your pension contribution than you (or your beneficiaries) end up paying on the benefit. At best, the opposite could be true. Just to add to the allowance complexities, the annual allowance remains, which places an effective ceiling on tax-relievable total contributions in a tax year of between £10,000 and £60,000, depending upon your income.

And will it all change back again?

When Jeremy Hunt announced, in March 2023, that the LTA would be culled, the Shadow Chancellor, Rachel Reeves, said that a Labour government would reinstate it. This remains the party’s position, although some pension experts believe that realpolitik will mean the pledge ends up having a low or no priority. If nothing else, the huge effort that has gone into not quite legislating to kill the LTA in 13 months is a disincentive to revisit the subject.