Pensions may be an incredibly effective way to save for retirement because you typically receive tax relief on your contributions. During your playing career, your club might also pay into your pension, meaning you can build your savings faster.
Recent changes to tax rules including the removal of the “Lifetime Allowance” (LTA), the total amount you could accrue in your pensions in your lifetime before triggering an additional tax charge, could make pensions even more attractive.
Read on to learn how the LTA worked and what its removal could mean for your retirement plans.
The removal of the Lifetime Allowance could mean you can make more tax-efficient contributions to your pension
Prior to 6 April 2023, the LTA limited the total amount of wealth you could accrue in your pensions before triggering an additional tax charge.
In the 2023/24 tax year, the LTA stood at £1,073,100. You would typically pay tax on any pension funds (including your contributions, employer contributions, and tax relief) that exceeded this threshold when a “benefit crystallisation event” occurred.
This included:
- Drawing an income or taking a lump sum from your pension
- Transferring the pension overseas
- Reaching age 75
- Dying with uncrystallised funds or death-in-service lump sums.
You would pay 25% tax (on top of your marginal rate of Income Tax) if you took the funds as income, or 55% for lump sums. Consequently, you potentially lost many of the tax benefits of paying into a pension on funds that exceeded the LTA.
Fortunately, in his 2023 Spring Budget, chancellor Jeremy Hunt announced that the LTA charge would be removed on 6 April 2023. The government then abolished the LTA altogether on 6 April 2024.
As a result, you may be able to make more tax-efficient contributions to your pension than you previously could. This may allow you to build your retirement savings faster if you increase your pension contributions to take advantage of the new rules.
Ultimately, this could give you a larger pension pot to draw on in retirement, so you are more likely to be able to fund your desired lifestyle.
Bear in mind that you are still limited by the “Annual Allowance”. This is the amount you, and others on your behalf such as an employer, can contribute to your pension each tax year without triggering a tax charge. In 2024/25, the Annual Allowance stands at £60,000. In addition, your own personal tax-relievable contributions are capped at 100% of your earnings or £3,600 if you have no earnings.
You may have a reduced Annual Allowance if your earnings exceed certain thresholds. You may be eligible to increase your Annual Allowance using carry forward of unused allowances.
You could still pay tax when accessing your pension as new rules have replaced the Lifetime Allowance
After abolishing the LTA, the government replaced it with three new allowances:
- Lump Sum Allowance (LSA) of £268,275 in 2024/25
- Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100 in 2024/25
- Overseas Transfer Allowance (OTA) of £1,073,100 in 2024/25.
As these thresholds relate to the LTA at last count, you may have higher thresholds if you previously applied for LTA protection.
Read on to find out how each of these thresholds will work.
Lump Sum Allowance
The LSA applies when you take tax-free lump sum benefits from your pension.
You can typically take the first 25% of your pension fund as a tax-free lump sum. However, under the new rules, if the size of your pension means that lump sum is more than the LSA, you will pay tax at your marginal rate on any amount that exceeds the threshold.
Lump Sum and Death Benefit Allowance
The LSDBA is tested against your 25% tax-free lump sum, as well as serious ill-health lump sums, or lump sum death benefits that are paid out when you pass away aged below 75.
If the combined value of the lump sums you take, and any lump sum death benefits your loved ones receive on your death before 75, exceeds the LSDBA, some tax may be due at the marginal rate of whoever receives your pension benefits.
Overseas Transfer Allowance
Finally, the OTA applies if you move your pension overseas to a qualifying recognised overseas pension scheme (QROPS). When transferring your pension to a QROPS, any funds that exceed the threshold of £1,073,100 will be chargeable at a rate of 25%.
This may matter to you if you move to a club in another country or you look to retire abroad after your playing career.
Depending on how much you have in your pension, these new tax rules could affect you when you retire.
You may want to seek professional advice before accessing your retirement savings to ensure you understand the rules and are being as tax-efficient as possible.
A future government could reinstate the Lifetime Allowance
After the chancellor first announced that he planned to abolish the LTA, the Labour party immediately came out in opposition to the policy.
In the wake of the initial announcement after the Spring Budget in March 2023, the party said that if it formed a government after the next general election, it would consider reinstating the LTA.
There has not been as much discussion about the LTA in recent months, other than predictions of what could happen. Yet, the initial stance of the Labour party demonstrates that these changes are not necessarily permanent, and you could be affected by the LTA again in the future.
Get in touch
If you need help navigating new pension tax rules, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
