UK Budget Pension Changes
The budget contained significant changes to the UK's pension allowance regime, with the most noteworthy difference being the effective removal of the Lifetime Allowance (LTA) from next month. The day after the announcement, the Labour party said they would reverse this change if they won the next general election. However, this would be a complex process, which could require another round of LTA "protection" similar to the one last seen in 2016. Such political manoeuvring creates uncertainty for long-term retirement planning, which requires certainty in the regulatory environment.
On the positive side, the budget announced three increases to the main pension annual allowances, enabling larger pension contributions to be made while still receiving full tax relief. These increases include the Annual Allowance (AA), which is increasing from £40,000 to £60,000, the Money Purchase Annual Allowance (MPAA), which is rising from £4,000 to £10,000, and the tapered annual allowance calculation, which is being adjusted. The taper will only start for Adjusted Incomes over £260,000, and the resultant minimum allowance will increase from £4,000 to £10,000.
The removal of the LTA from 6 April means that there will no longer be an LTA tax charge when pension benefits are crystallized, though there will still be an LTA test for 2023/24. From 2024/25, this process may be further simplified. However, there will still be a need to monitor cumulative tax-free lump sum payments. The tax-free lump sum remains at 25% of the pension value, limited to 25% of an individual's LTA. Going forward, this maximum is now frozen, although those with a historically protected LTA will retain their increased lump sum as 25% of their protected LTA. This means it will be necessary to continue monitoring and keeping track of any protection to secure the increased lump sum access.
One significant change is that those with Enhanced or Fixed Protection can now make further pension accrual from 6 April, which was not possible under the previous rules. The LTA tax charge was previously either 25% or 55%, depending on whether the net benefits were taken as income or a lump sum. This charge would apply when benefits above an individual's LTA were crystallized; a member reached 75 with uncrystallized benefits or on the member's death pre-age 75 with uncrystallized benefits. However, no LTA tax charge will arise in the future. "lump sum" withdrawals beyond the tax-free lump sum limit will be taxed at marginal income tax rates.
In general, removing the LTA and related tax charges is a significant tax benefit for those with pensions that are or will be above the previous limit.
However, the continued limit on the tax-free lump sum slightly mitigates its impact. Those with sufficient income and cash flow to freely utilize the annual allowances may now choose to do so, even if their fund is over the previous LTA limit, receiving high marginal rate tax relief and in the knowledge/expectation that no tax will arise on death in respect of any funds remaining within the pension.
However, the upcoming general election may cause further changes, and planning for retirement is difficult when pensions are used as a political football.
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