PIVOTAL SHIFT CHANGES YOU NEED TO KNOW COMMENCED FROM 6 APRIL 2024

Beginning on 6 April 2024, a pivotal shift in pension benefit taxation commenced. The Lifetime Allowance (LTA) was replaced by a new structure comprising three distinct allowances: the Lump Sum Allowance (LSA), Lump Sum and Death Benefit Allowance (LSDBA), and Overseas Transfer Allowance (OTA).

The implications of these changes will largely depend on individual circumstances, such as the aggregate value of one’s pension savings, any prior withdrawals from pension schemes and existing lifetime allowance protections.

DELVING INTO THE LUMP SUM ALLOWANCE

The introduction of the Lump Sum Allowance (LSA) aims to cap the tax-free sums that can be withdrawn from pension schemes. Set at a baseline of £268,275, this allowance may adjust based on factors including previous pension withdrawals or the presence of Lifetime Allowance protections or protected tax free cash allowances. From 6 April 2024 onwards, tax free lump sums taken will be deducted from the individual’s LSA.

The LSA applies to both the Pension Commencement Lump Sum (PCLS) and the tax-exempt portion of any Uncrystallized Funds Pension Lump Sum (UFPLS), with these withdrawals also being assessed against the available Lump Sum and Death Benefit Allowance (LSDBA). Typically, the maximum tax-free lump sum accessible will be determined by the lowest of 25% of the benefits being accessed, the LSA and the LSDBA.

EXPLORING THE LUMP SUM AND DEATH BENEFIT ALLOWANCE

The Lump Sum and Death Benefit Allowance (LSDBA) further restricts the tax-free lump sums withdrawable from pensions and those payable to beneficiaries upon the policyholder’s demise pre age 75. This allowance does not apply to benefits already in drawdown before 6 April 2024. Initially set at £1,073,100, the LSDBA may vary depending on previously taken pension benefits or existing lifetime allowance protections. The LSDBA covers the exact lump sums as the LSA but additionally applies to serious ill-health lump sums disbursed before age 75 and lump sum death benefits if the policyholder passes away before reaching age 75.

Posthumous benefits are only subject to the LSDBA when paid out as tax-free lump sums. Conversely, suppose benefits are allocated to provide a beneficiary with a drawdown pension. In that case, they are exempt from being tested against these allowances, with income typically remaining tax-free if the policyholder dies before age 75, however lump sums will be tested. Despite previous suggestions, these provisions will remain unchanged from 6 April 2024 as per the current legislation.

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THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX PLANNING.