The Finance Bill published at the end of 2023 confirmed the government is pushing ahead with the abolition of the Lifetime Allowance (LTA) from 6 April.
This is a very short and, I believe, unrealistic timescale to introduce such a major legislative change. For advisers, there isn’t much time to understand the impact, work out which clients may be affected, and then consider any action to take.
So, let’s look at what we know.
There will be a new lump sum allowance of £268,275
As before, most people can take up to 25% of their pot as a tax-free lump sum and each amount is counted towards the overall £268,275 figure. Those with some form of tax-free cash protection can get a higher amount. For those who have scheme specific tax-free cash protection, the way this will be done in practice is to take the normal 25% off the lump sum allowance even though the individual is actually receiving more cash.
Let’s say I hadn’t taken any benefits before, and I was taking a £600,000 pot where I had protected tax-free cash amount of £280,000. While this is greater than the standard lump sum allowance, only £150,000 (25% of the £600,000) would be deducted off my individual lump sum allowance, leaving me a further £118,275 to use in future.
People with some form of protection such as individual or fixed protection will receive a higher lump sum allowance.
For those individuals who have taken some benefits before 6 April 2024, normally 25% of the previously crystallised amount is deducted from the lump sum allowance. For example, if I had used 80% of my LTA previously, then I would deduct £214,620 (25% of £1,073,100 x 80%) from my lump sum allowance, leaving me £53,655 to use. That would be the case even if an individual had received more than 25% of the crystallised amount as tax-free cash.
More complexity can arise if a client hadn’t taken 25% of the crystallised amount as tax-free cash at the original crystallisation. This may have arisen, for example, if an individual received benefits from a defined benefit scheme. A new certification regime will be introduced where, if an individual can provide the necessary proof, the lower tax-free cash amount they actually received will be deducted rather than the 25% figure.
The second key allowance is the lump sum and death benefit allowance of £1,073,100
This measures tax-free lump sums paid during the member’s lifetime and lump sum death benefits paid following the member’s death before age 75. Anything paid as a lump sum above this level is taxed as income in the beneficiary’s hands. People with some form of protection will receive a higher allowance.
There are a couple of key points to note here. Previously, if someone crystallised benefits into drawdown and then the individual died before age 75, the whole amount could be paid as a tax-free lump sum. That included any growth between date of crystallisation and date of death, which effectively was never tested against the LTA.
Now, the key date is the date of death – the lump sum paid at death is measured against the lump sum and death benefit allowance and that will include any investment growth during drawdown.
Importantly, any benefits paid as income to a beneficiary following death before age 75 isn’t tested and is paid tax-free. That may mean setting arrangements so should a client die before age 75, funds cascade into beneficiary drawdown. The beneficiary can then take large tax-free income payments at any time. Completing and keeping up-to-date expression of wish forms will continue to be crucial.
As highlighted, the timescales are demanding. There are several areas within the Bill where the industry is seeking further clarification and detail. And we shouldn’t forget this is a Bill and so, by its very nature, may be changed on its route to being enacted.
Further uncertainty comes from the fact the Labour party has said its intention is to reverse this policy should it come into power. If the election takes place after April when this legislation is in force, it seems difficult to see a way for that to easily happen. New limits can of course be introduced but those would likely be from a future date.
This is a difficult area with short timescales involved and some ongoing uncertainty. It’s clear many clients will need help working out their best options, while others will benefit from reassurance they are not affected. The benefits of advice are clear to see.
In conversation with… Andrew Tully
Kimberley Dondo talks to Andrew on the Money Marketing podcast. They cover the Advice Guidance Boundary Review, retirement concerns, and Nucleus’ support for advisers in navigating regulations. Listen now.
