SkipNav

Abolition of the lifetime allowance

26/07/2023

The Spring budget of 15 March 2023 announced that the lifetime allowance charge would be removed for the 2023/24 tax year and that the lifetime allowance would be abolished fully as from 6 April 2024.

Since that time, the pensions industry has been anticipating what the new rules might look like after 5 April 2024 and whether any other changes might be included.

On 18 July 2023, further details emerged. A policy paper was published alongside draft legislation explaining how the government intend to implement the changes.

The main changes

As expected, the draft legislation looks to remove the lifetime allowance and most benefit crystallisation events (BCE). It also provides for:

  • The introduction of a lump sum allowance of £268,275 and a lump sum and death benefit allowance of £1,073,100 - These limits cap the amount of tax-free cash individuals (and their beneficiaries) can receive, except where protections apply.
  • The position for individuals with lifetime allowance protections, lump sum protections or lifetime allowance enhancement factors.
  • Confirmation that the final date for applications for Fixed Protection 2016 and Individual Protection 2016 will be 5 April 2025.

A few surprises

The draft legislation is not comprehensive. Some aspects, including BCE5C and BCE5D, where uncrystallised funds are designated into either beneficiary’s flexi-access drawdown or a beneficiary’s annuity) are not covered. In addition, international and transitional elements are not included in the legislation, nor are transitional provisions for those who have already incurred a lifetime allowance charge. 

One area that has caused some concern is whether the preferential tax treatment of pension death benefits will retain their preferential tax treatment on death before 75. Although not yet covered in the draft legislation, the policy statement does state that: 

‘Individuals will still be able to receive the benefits which are currently tested against the LTA at BCEs 5C and 5D, but the values will no longer be excluded from marginal rate income tax under ITEPA, with effect from 6 April 2024’. 

This suggests an intention that at least some death benefits that can currently be designated into beneficiary’s drawdown or an annuity and paid tax free, may now be taxable.

Comment

Publication of these proposals and draft legislation gives providers and planners some early indication of how the abolition of the lifetime allowance will be implemented and is therefore welcome.

However, less agreeable is the suggestion that the preferential tax status of pension death benefits might be changed. This is an area that the industry will be closely monitoring and will be of particular interest to anyone using their pension as part of their wider estate planning.

HMRC are currently still in dialogue with stakeholders about these measures and will hopefully take into account the feedback they receive from the pension industry. We’ll be issuing further updates as things progress and will of course provide a full summary as soon as the final details are known.

If you have any questions around this or any other technical matter, send your query to [email protected]  

Important Information

Please note this is for general information only and is based on LV=’s understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.