Much like how the laws of rugby are updated to reflect the modern game, financial rules and regulations constantly shift over time. Whether that is around tax, savings, investments or, in particular, pensions, such adjustments have the potential to notably change the way you manage your wealth.
In April 2024, the pension landscape changed significantly when the government abolished the Lifetime Allowance (LTA).
The LTA previously applied a lifetime limit to how much you could hold within your combined pension pots before facing an additional tax charge when you came to withdraw your funds.
At last count, the LTA stood at £1,073,100 for most people. You may have had a higher LTA if you previously applied for one of the various LTA protections.
If your total pension savings exceeded this amount, then you would have seen an additional tax charge applied to your withdrawals and when you reached age 75. This charge was 55% on funds drawn as lump sums, and 25% (on top of your marginal rate of Income Tax) on funds taken as income.
You may have read the article we published around the time of the LTA abolishment, detailing what these changes would mean for you as a professional athlete.
October marks six months since the abolishing of the LTA and the implementation of new rules, making this a perfect chance to look at this again now that the dust has settled.
So, read on to find out more about the details of these changes, and what they might mean for rugby players like you.
The Lifetime Allowance was replaced by 3 new allowances
The reason the government wanted to abolish the LTA was to incentivise high earners (particularly in professions such as medicine) to stay in work and continue saving into their pensions. Otherwise, individuals were more likely to retire once their savings exceeded the LTA, knowing that they would face a larger tax bill in future.
But, although the government wanted to lift the cap on lifetime tax-efficient savings, it still wanted to partially control the way savers withdraw from their funds.
As a result, the government instated three new allowances to replace the LTA, all relating to the way that you (and potentially your beneficiaries) draw lump sums from your pension.
These allowances are the:
- Lump Sum Allowance (LSA). When you first access your pension, you can usually take the first 25% tax-free. The LSA limits this tax-free entitlement to up to £268,275, which is 25% of the previous LTA limit.
- Lump Sum and Death Benefit Allowance (LSDBA). This allowance encompasses lump sums taken under your LSA, as well as ill-health lump sums and benefits paid on your death. In line with the LTA, the LSDBA stands at £1,073,100. When your lump sums and any death benefits paid exceed the LSDBA, your beneficiaries may face Income Tax at their marginal rate when inheriting your wealth. All death benefits are taxable at the marginal rate of your beneficiaries if you are over 75 when you pass away, so these are no longer tested against the LSDBA.
- Overseas Transfer Allowance (OTA). The OTA controls the amount you can transfer when moving your pension overseas to a qualifying recognised overseas pension scheme (QROPS). Like the LSDBA, the OTA stands at the same previous LTA limit of £1,073,100. If you transfer funds in excess of the OTA, you could face an additional overseas transfer charge of 25%.
It is important to be aware that your allowances could be higher or lower than the set amounts here. Find out more in the sections below.
Your allowances may be higher or lower than these set amounts
In specific circumstances, your allowances may be substantially different to those described above.
Lifetime Allowance protection may mean your allowances are higher
It is important to note that your allowances may be higher if you had previously applied for LTA protection. In this case, your LSDBA and OTA may be level with your protected LTA, with your LSA standing at 25% of this figure.
If you are early on in your rugby career, it is unlikely that you will have a protected LTA. That said, if you are a senior player or already retired, you may have LTA protection. Additionally, you may still be able to apply for LTA protection retrospectively in certain circumstances.
Make sure you speak to us if you are unsure whether this affects you.
You may have reduced allowances if you had already started drawing your pension
On the other hand, if you had already started drawing your pension benefits, your allowances may be reduced to account for the wealth you have already taken.
This calculation will usually revolve around how much of the LTA you had already used before 6 April 2024.
Of course, if you are still playing rugby, it is relatively unlikely you will be affected by this rule. It is worth speaking to a professional if you are unsure if you have already accessed your pension or how your allowances could be affected. These calculations can be complex, so it is sensible to take advice.
It is worth planning around these allowances during your playing career and beyond
Just as was the case in April, it is well worth being aware of these pension rule changes and how they may affect you. Even if you are in the middle of your playing career now, it can be prudent to think about how you manage your pension around these allowances, and what they mean for you.
For example, the LSA could affect the way you draw your retirement income, as it places a limit on how much of your pension you are able to access tax-free. Knowing this ahead of time means you can plan around this tax-free cash and potentially use it to make your income more tax-efficient.
Similarly, the OTA could be a consideration if you move to play rugby abroad, or simply decide to emigrate and retire in a different country.
Finally, the LSDBA might affect how you organise your wealth for your loved ones, choosing where to save so that your beneficiaries can inherit wealth from you as tax-efficiently as possible.
By understanding the rules, you give yourself the opportunity to make strategic financial planning decisions that help you make the most of the wealth you earn from rugby.
Get in touch
Changes to pension legislation can be confusing, and you may not be sure how to most effectively manage your wealth. Fortunately, we can help at DBL Asset Management.
We are experienced financial planners who work specifically with rugby players like you. We know and understand the challenges you might face throughout your career, and will build a bespoke financial plan specifically for you and your family.
If you would like to find out more about what we can do for you, 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. All contents are based on our understanding of HMRC legislation, which is subject to change.
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.
The Financial Conduct Authority does not regulate tax planning.
