LTA Removed: Restart Your Pension Contributions and Carry Forward up to £200,000
Introduction
In spring 2023, the government took pension savers by surprise, by announcing the removal of the Lifetime Allowance (LTA) Charge. In the 2023-24 tax year, the tax charge for exceeding the Lifetime Allowance threshold of £1,073,100 (or a higher threshold where LTA protection applies) was effectively removed, and the Lifetime Allowance itself was abolished from 6 April 2024.
The removal of the Lifetime Allowance is particularly welcome news for those whose pensions were already above the value of the LTA, and who were nearing a benefit crystallisation event – including turning 75 years old, drawing down funds, purchasing an annuity, or indeed upon their death.
Pensions are also regarded as a tax-efficient way to pass on wealth, as they are generally not considered to be part of a person’s estate for inheritance tax purposes. The removal of the LTA charge further enhances this benefit.
Many who stopped making contributions to their pension, will now be considering restarting contributions. If you’ve been a member of a qualifying pension scheme, but haven’t used your annual allowances for 2023/24 (£60,000), 2022/23 (£40,000) or 2021/22 (£40,000), then together with this year’s annual allowance of £60,000, you could kickstart your pension by carrying forward these allowances to make a one-off contribution of up to £200,000.
How has the removal of the LTA changed retirement planning and saving?
In the UK, employers are required to contribute to their employees’ pensions at a minimum rate of 3% of qualifying earnings, subject to that employee contributing at least 5% of their qualifying earnings. Over time, it’s a considerable benefit of being employed in the workforce. Previously, as workers’ pension savings had approached the LTA, they were becoming disincentivised to continue working. Now, employees may work longer, and those who had already retired may consider re-joining the workforce, which could lead to greater macroeconomic performance in the UK economy, and potentially lessen the burden on the state to subsidise people’s retirements.
While it’s important to note that the Lifetime Allowance Charge might be reintroduced in the future, its removal coincided with the government raising the annual allowance from £40,000 to £60,000 (or 100% of your UK Relevant Earnings, whichever is lowest) with effect from the 2023-24 tax year. The purpose of the LTA had been to cap the tax privileges of pensions. Additional rate taxpayers qualify for income tax relief on pension contributions at up to 45%. If an additional rate taxpayer had opted to use their entire annual allowance at the previous level of £40,000, they would have attracted up to £18,000 in tax relief. With the increased annual allowance of £60,000, they could gain up to £27,000 in tax relief; an additional £9,000 a year. This may incentivise a greater amount of pension saving, subject to the limits on tax relief on pension contributions, before savers turn to other investment vehicles such as ISAs.
Despite the removal of the LTA charge benefitting many savers, the complex tapered annual allowance (TAA) remains for those with threshold income in excess of £200,000 and adjusted income in excess of £260,000 who will see their annual allowance (the maximum they may save into their pension that tax year and still benefit from tax relief) taper down (to a minimum of £10,000) by £1, for every £2 their adjusted income exceeds £260,000.
In 2012, 2014 and 2016, some pension savers had the opportunity to take out fixed protection against the falling Lifetime Allowance. Each form of fixed protection allows the claimant to retain the level of Lifetime Allowance that was available immediately before the reduction (£1.8 million, £1.5 million and £1.25 million respectively). As a result, those claimants have not made pension contributions for several years in order to preserve their protection.
With the removal of the Lifetime Allowance Charge, claimants are likely to want to restart pension contributions. This would previously have automatically resulted in the fixed protection being lost and would have resulted in their maximum tax-free cash dropping to the current level of £268,275.
However, HMRC has since confirmed that, as long as fixed protection had been registered before 15 March 2023, the protections cannot be lost. They can therefore restart their contributions without renouncing their bigger tax-free lump sums.
What next?
If over the last few years, you had elected to cease making pension contributions, as the value of your pension crept above £1 million; then the removal of the Lifetime Allowance may represent a unique and valuable opportunity to significantly boost your retirement savings.
Assuming, as a member of a qualifying pension scheme, you have not used any of your annual allowances from the tax years 2021/22, 2022/23, 2023/24, and the current tax year 2024/25, you could make contributions amounting to up to £200,000 before 6 April 2025 – provided you are not subject to tapering in any of those years.
The net cost of each £1,000 contribution could be as little as £550.
That’s because you’ll receive automatic basic rate tax relief of 20%, and an additional rate taxpayer may claim a further 25% tax relief via their tax return.
And, because of the gradual loss of your personal allowance for income between £100,000 and £125,140 resulting in an effective 60% tax trap, you could gain even more if restoring your full personal allowance.
There are a number of factors that may cause different results in individual circumstances, which is why it’s important to seek professional advice from an expert adviser, to help you maximise the amount you can contribute to your pension and benefit from tax relief on this year.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time.
The value of any tax relief is dependent on individual circumstances.
Any tax relief over the basic rate is claimed via your annual tax return.
