From April this year, the Government has announced the pending abolishment of the Lifetime Allowance on pension pots to keep more people in the workforce. Inshort, you can now earn more money for your retirement without incurring tax.

But how will these changes affect you?

The Lifetime Allowance Changes Overview

When it comes to retirement planning and making the most of the recent changes to the lifetime allowance, seeking professional advice and guidance is of utmost importance. 

Recent changes to the annual and lifetime allowances in the UK have significant implications for retirement planning. The lifetime allowance (LTA) sets the maximum tax-efficient value of all retirement benefits and is set by the government. The government announced several changes to the annual allowance, lifetime allowance, and tax-free cash in the Budget in March 2023. These changes included the abolition of the lifetime allowance and an increase in the annual allowance. We’re here to delve into the details of these key

changes and how they may impact your retirement plans. 

Five key things you need to know about the lifetime allowance changes

  1. The lifetime allowance (LTA) charge has been abolished from 6 April 2023. However, it’s important to note that your pension is only tested against the allowance when you take it. If you don’t take your pension benefits and the LTA is reintroduced in the future, you will miss out.
  2. You can still take up to 25% of your fund as tax-free cash. Individuals with large pensions who have previously qualified for transitional LTA protection may be able to take up to £450,000 of their pot tax-free.
  3. If you had stopped paying into a pension, you can carry forward unused annual allowances from previous tax years. This means you could pay up to £180,000 into a pension and receive tax relief.
  4. Many decisions regarding pensions are irreversible. Once you make choices on how to take benefits or whether to take a tax-free lump sum, they cannot be changed. It’s crucial to ensure that you are absolutely certain you are making the right decisions for your future.
  5. Current market conditions, including rising interest rates, present an opportunity to secure a higher guaranteed income for life from your pension fund. Calculations based on interest rates at the time show that at the end of January 2022, a £1,000,000 pension pot could have provided an annuity income of £50,030 per year. In January 2023, the same amount could have secured an annuity of £68,920 per year, representing a near 38% increase.

The immediate financial planning opportunities

Now is the time to capitalise on the immediate financial planning opportunities brought about by the recent changes to the lifetime allowance. Consider the following strategies to make the most of these developments:

Amplify your tax-free contributions: Consider taking advantage of the abolished lifetime allowance charge by making additional contributions to your pension, allowing you to supercharge your retirement savings. This opportunity is especially valuable if you are nearing or have already exceeded the lifetime allowance.

Optimise tax efficiency and inheritance planning: Explore the potential tax benefits by transferring cash, or surplus funds into your pension. Our expert advisers can guide you through the most effective strategies, especially if you have lifetime allowance protection.

Make informed retirement timing decisions: If your pension has already surpassed the lifetime allowance and retirement is on the horizon, carefully evaluate whether it is more advantageous to continue saving or start taking your pension now. Our skilled advisers will provide personalised insights based on your unique circumstances, empowering you to make informed choices.

Enhance retirement savings for existing pensioners: Even if you are currently receiving your pension, don’t miss out on the opportunity to make additional tax-efficient contributions and bolster your retirement funds. This can have a substantial impact on securing a more prosperous financial future. There will be certain limits around additional contributions if the MPPA has been triggered. The MPPA allowance for 2023/24 is £10,000.

Ultimately, the Lifetime Allowance changes will only impact a small group of people, and if they affect you, it is wise to discuss your options with your financial adviser.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

For specialist tax advice, please refer to an accountant or tax specialist.

This article is for guidance purposes only and should not be deemed as advice.