In the run up to any Budget statement, you will always read and hear speculation as to what the chancellor will reveal when he makes his speech to the House of Commons. 

One of the big talking points before the recent Budget, for example, concerned the pension Lifetime Allowance (LTA). 

This is the amount you have been able to save in a UK pension fund across your lifetime before incurring an additional tax charge when you come to withdraw. Over the years, it has been reduced from a high of £1.8 million to the 2022/23 tax year figure of £1,073,100. 

Rather than increase it, as was expected, the chancellor surprised everyone by announcing that it would not be applied at all in the 2023/24 tax year, reducing the charge to 0%. Furthermore, he also confirmed that he would be introducing legislation to abolish the LTA entirely.

Find out how the reduction of the LTA charge could affect your pension savings, as well as other aspects of your future financial planning strategy.

What the changes to the LTA mean for you

At its 2022/23 tax year level of £1,073,100, the LTA had become increasingly easy for you to exceed, especially if you are a high earner or have been accumulating savings in your pension fund for an extended period.

The removal of the tax charges, and planned abolition, means you will now be able to contribute significant amounts to your pension without being concerned about a potential tax charge for accruing “too much” in your fund. That may have been either through your own contributions, employer contributions, or the investment growth you enjoy. 

The only limit is the amount you can contribute that will attract tax relief, and the chancellor had further good news in that regard too.

The Annual Allowance has been increased

The Annual Allowance is the gross amount you can contribute to your pension fund in an individual tax year, while still benefiting from tax relief at your marginal rate of Income Tax. 

As well as removing the LTA charge, the chancellor also confirmed a substantial increase in the Annual Allowance from £40,000 to £60,000 gross in the 2023/24 tax year. 

This means you can really give your retirement fund a boost, especially if you also bear in mind that you can carry forward unused Annual Allowance from three previous tax years. So, the gross maximum you could pay into your pension tax-efficiently is now £180,000, subject to the Tapered Annual Allowance (TAA) not applying.

You may have reduced your pension contributions, or even stopped them entirely, for fear of exceeding the LTA. Not only can you now restart, but you can also make up for lost time quickly. 

However, it was not all good news from the chancellor

After the confirmation of the removal of the LTA charge and the boost to the Annual Allowance, there was some less welcome news in the Budget statement. 

This was the announcement that the maximum pension commencement lump sum (PCLS) will be retained at its current level of £268,275 in the 2023/24 tax year, unless protection is in place. Not only that, but it will be frozen at that amount thereafter.

This means that, regardless of how much you accrue in your pension fund, the maximum amount you can draw from it as a tax-free lump sum will continue to be limited at the previous level.

One effect of this is to make it important for you to have an effective savings and income strategy in place to ensure that you are maximising all other tax-efficient savings options. Doing so will help you minimise the amount of Income Tax you pay when you retire. 

The removal of the LTA is a boost for your Inheritance Tax planning

The current Inheritance Tax (IHT) rate is 40%. This is charged on the total value of your estate that is above the nil-rate band (NRB), which is currently £325,000. This amount can increase to £500,000 if you leave your residential property with a value of at least £175,000 to your direct descendants (such as children, grandchildren, adopted or fostered children, and stepchildren) and the total value of your estate is less than £2 million.

It is easy to appreciate that if you have substantial assets, the amount of IHT your family could be liable for on your death may well be considerable. 

However, your pension fund is not normally included in the value of your estate when your IHT liability is calculated. This means the removal of the LTA could make your pension fund a valuable and highly tax-efficient financial planning facility. 

Be aware that Labour have pledged to reinstate the Lifetime Allowance

It is prudent for you to understand that, despite the positive announcement made by the chancellor, there is still a level of uncertainty over the LTA.

For one thing, the ultimate abolition is still subject to legislation, so you may find some devil in the detail when that is eventually published. 

Furthermore, immediately after the Budget speech, the Labour shadow chancellor, Rachel Reeves, pledged to reinstate the LTA if her party is in government after the next election.

However, her announcement was an instant response to a surprise announcement. It is likely that, if they do form the next government, the Labour Party will have a wider pension and retirement strategy that could offer both opportunities and threats when it comes to your pension savings.

Get in touch 

If you have any queries as to how the LTA changes could affect your retirement planning, please do get in touch with us at DBL Asset Management.

Email or call 01625 529 499 to speak to us today.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate tax planning or estate planning.