Clients are starting to wonder if it now makes sense to move money from a general investment account into a pension, where their investments are tax sheltered until withdrawal or make additional contributions from personal income or business profits.
Equally, clients who have fixed protection are asking if they can commence making pension contributions and what impact this has on their tax position.
Financial Planning by TaxAssist has written this guide to provide a high-level summary of the changes to the Lifetime Allowance, and some of the main talking points individuals with larger pension pots should be considering.
What is changing in relation to pension allowances and tax?
There are a number of limits which apply to the amounts you may save into your pension, and one of these is the Lifetime Allowance. The effect of this limit is that you may be charged additional tax when you take more than your allowance from your pension – not just when your pension pot reaches it.
The current lifetime allowance is £1,073,100 with anything above this limit facing a tax charge of up to 55%, but this is all due to change from April 2023.
From 6th April 2023, you will be able to join and contribute to arrangements without facing a Lifetime Allowance tax charge.
It is important to be aware that there are a number of other rules which restrict the amount you may contribute to a pension, so you should fully review your position before taking action.
When will this change happen and can it be reversed?
The Government intend to change the law from April 2024, but the change will be effective from April 2023.
As always, it isn’t possible to look into the future and predict future tax changes with 100% certainty. We can therefore only act based on current and announced rules, knowing these may be subject to future changes.
Does the changes in the Budget impact my entitlement to a tax-free lump sum?
Currently, when an individual becomes entitled to their pension benefits, they can often make use of the pension commencement lump sum rules. This is often thought of as a 25% tax free lump sum entitlement. The Budget has changed these rules and the tax-free lump sum will be limited to £268,275, 25% of the current Lifetime Allowance. The end result is that the cash-free position hasn’t materially changed from before. The Chancellor has just prevented the potential for a huge increase in tax free cash and this was a prudent thing to do to avoid exploitation of the otherwise very favourable new regime.
Who is entitled to a higher tax-free lump sum?
Since the introduction of the Lifetime Allowance, it’s value has been steadily eroded over time. On introduction and on occasions when the allowance was reduced, individuals with pension savings in excess of the allowance were potentially able to apply for protection. Protection safeguarded against a future tax charge arising from exceeding the Lifetime Allowance by making relevant tax elections. These elections could also entitle individuals to a higher tax-free cash lump sum.
From 6th April 2023, you will be able to keep your entitlement to a higher tax-free lump sum where you hold a valid enhanced protection or any valid fixed protections, and the protection was applied for before 15th March 2023, and a certificate or reference number is issued.
You will also be able to join and contribute to new arrangements and make pension transfers without losing this protection.
In summary, this is good news for the minority of taxpayers who used fixed protection enabling additional contributions to be made where previously may have been subject to adverse tax consequences.
What impact will the change to the Lifetime pension allowance have on Inheritance Tax?
The abolition of the Lifetime Allowance makes pensions an even greater way to mitigate an Inheritance Tax charge. This is because your pension can potentially be passed to your beneficiaries free of Inheritance Tax when you die before the age of 75. If you die after age 75, there is still no Inheritance Tax but your beneficiaries may have to pay income tax at their marginal rate.
These changes could therefore provide an enhanced shelter for families concerned to protect against Inheritance Tax charges.
What should I do?
Due to the complexities arising from larger pension assets, you should speak with an Independent Financial Planner to review your circumstances before taking any action.
Financial Planning by TaxAssist has a team of pension planners who can provide advice and support which is tailored to your specific needs.
Alternatively look out for details of the Financial Planning by TaxAssist Pensions Webinar at 12:30pm on 19th May, which will look at the Lifetime Allowance changes and we will be hosting a Q&A session with our pensions planners. Other topics being discussed include:
- The recent changes to pension tax announced in the Spring Budget
- The changes to the Annual and Lifetime Allowances and how it effects the amount you can contribute tax efficiently to your pension?
- Planning for retirement, how much you need and how to go about building a pension pot to meet your goals?
- How pensions can be used to reduce an inheritance tax liability?
- Q&A session