The new era of pension allowances: What does the end of the Lifetime Allowance mean?

The beginning of the 2024/25 tax year saw the end of the Lifetime Allowance (LTA) for pensions, which marks a significant shift in retirement planning and wealth management for pension savers in the UK. Abolishing the Lifetime Allowance is set to reshape how individuals approach their pension savings, bringing in new rules and opportunities for investors.

As we head into a new era of pension allowances, it’s important to understand the implications of these changes. Let’s take a look…

What was the role of the Lifetime Allowance?

Until its abolition, which came into effect from 6th April 2024, the LTA was a cap on the amount that an individual could build up in their pensions without triggering an additional tax charge. Set at £1,073,100, the LTA aimed to limit the tax-privileged growth of pensions. In retirement planning, this often came as a complex obstacle for high earners and diligent savers.

The abolition of the Lifetime Allowance

Abolishing the LTA was driven by an aim to simplify the retirement savings landscape and encourage higher levels of personal saving for retirement.

The decision to scrap the LTA is expected to have a number of effects:

Increase flexibility in pension contributions
By removing the cap on tax-free pensions savings, individuals will feel more at ease to invest in their pensions without the worry of hitting the LTA limit.

Enhance retirement planning
With tax implications of exceeding the LTA no longer applicable, investors can now consider more aggressive growth strategies for their pension funds. Younger investors who have more time to benefit from compound growth will find this particularly beneficial.

Potential for higher retirement incomes
Removing the LTA may mean individuals will have higher pension pots at retirement, particularly those who are able to maximise their contributions over a long period.

What are the new pension allowances?

To balance out the removal of the LTA, three new pension allowances have been introduced. These new allowances are designed to manage the extent of tax relief available for pension contributions in a different way.

The new pension allowances are:

1. Lump Sum Allowance (LSA): With an aim to simplify how people access their pension funds, the LSA will set a £268,275 limit on tax-free lump sums.
2. Lump Sum and Death Benefit Allowance (LSDBA): The LSDBA introduces a £1,073,100 allowance, impacting both lifetime withdrawals and death benefits. This allowance is crucial for estate planning and maximising the value of your pension to beneficiaries.
3. Overseas Transfer Allowance (OTA): Also set at £1,073,100, the OTA measures the value of pension benefits transferred to qualifying recognised overseas pension schemes (QROPS). As long as the pension benefits are within the allowance, they can be transferred to a QROPS tax-free. Any excess will be taxed at 25%.

For those who have already crystallised some but not all of their pension benefits, there are transitional arrangements available. If you have taken any money from a pension in the past, please get in touch so we can discuss this in more detail.

Financial planning considerations

As a result of the changes to pension allowances, strategic financial planning is even more critical. There are several factors we consider…

• Review of current Pensions strategy: We will review your current pension strategies to ensure they align with the new rules. This might involve adjusting contribution levels or revisiting investment choices.
• Tax planning: We will carefully manage the interplay between various tax wrappers and the new pension allowances, with an overall aim to optimise tax efficiency.
• Regular reviews: It’s more important than ever to regularly review your plans with us to understand the nuanced implications of these changes on personal financial goals and tax obligations, to ensure your plan reflects changes to tax legislation.

We’re here to help

Our team of financial planners are here to guide you through the transition into this new framework of pension allowances. For many of our clients, the new rules open up further possibilities for enhancing wealth accumulation and crafting a more tailored retirement strategy. If this is something we can help support you with, please get in touch with our friendly team of experts.