As you may have read, in his spring Budget, the chancellor announced perhaps the most significant change to pension legislation since the 2015 Pension Freedoms reforms.

Before the Budget, many expected Jeremy Hunt to raise the Lifetime Allowance (LTA) to match rising inflation. 

Since 2006, the LTA has marked how much an individual’s total pension wealth can reach without being subject to an additional tax penalty on withdrawal. Its amount has varied over the years, and in 2022/23 it stood at £1,073,100.

Surprisingly, the chancellor went one step further than most predicted, announcing that from 6 April 2023, the LTA tax charge would be removed from pension withdrawals, and is set to be abolished completely in a future Finance Bill. 

Your retirement could be directly affected by the government’s Lifetime Allowance reforms

Hunt’s LTA reforms might be great news for you if you:

• Have total pension wealth that is more than or likely to grow past £1,073,100
• Are set to draw from your personal pension pot in the coming few years
• Want to maximise your pension contributions within the £60,000 Annual Allowance without the worry of additional penalties
• Are seeking to mitigate your tax bill in retirement overall.

Yet beneath this headline-worthy announcement, there are details you should be aware of if you or your clients are drawing a pension soon.

Here are three key things to know about the recent LTA reforms.

1. You can now boost your pension contributions without the worry of an LTA tax charge – but this doesn’t mean your withdrawal will be tax-free

In the 2022/23 tax year, drawing any pension funds above the LTA threshold would incur an additional tax charge of: 

• 55% on funds drawn as a lump sum
• 25% on funds drawn as income. This would be on top of your marginal rate of Income Tax.

Now, this extra charge has been removed altogether. 

If you are yet to retire and have a large pension pot already, the chancellor’s removal of the LTA limit could come as welcome news. Your pension wealth can now surpass the previous LTA limit of £1,073,100 without the threat of an additional tax charge hanging over your head.

Nevertheless, it is important to be aware that you are likely to still pay tax when you draw your pension. While you can now boost your pension contributions without worrying about the LTA, your future withdrawal shouldn’t be mistaken for being “tax-free”.

Indeed, the pension commencement lump sum (PCLS) will remain at 25% of the LTA’s most recent value (£1,073,100) – equivalent to £268,175. The PCLS, sometimes called the “tax-free lump sum”, states that an individual can withdraw 25% of a personal pension pot tax-efficiently within the LTA limit.

So, while you could benefit from the chancellor’s removal of the LTA tax charge, learning how your large pot could be taxed can help you prepare for your liability in retirement.

Seeking financial advice is likely to benefit those with large pension pots. Here at WKM, we can help you work out your potential pension tax bill before you retire.

2. Labour say they will reinstate the Lifetime Allowance if elected in 2024

As a general election is expected around December 2024, it’s essential to note that Labour have vowed to reinstate the LTA if they win. 

According to PensionsAge, shadow chancellor Rachel Reeves called the move a “gilded giveaway” and promised that “a Labour government will reverse this move”.

If you are yet to draw your pension, and may not do so for a few years yet, you could be understandably worried about being hit by an LTA charge if it is reinstated in the years to come. 

While there is no way of knowing how the next general election will swing, focusing on your long-term retirement plans could be constructive here. 

Consulting a financial planner can help you prepare for a U-turn if one occurred, so you know that no matter what happens in the political sphere, you have a solid financial plan in place.

3. If you are set to retire in the next decade, seeking professional advice could be invaluable

With so much information to take in about the recent LTA reforms, you might feel conflicted about your next steps.

Indeed, while the LTA tax charge removal is great news for many, as with all financial legislation, nothing is set in stone. This opportunity to build up your pension pot shouldn’t go amiss, yet planning for opposing legislation, if it comes in, could put you in a favourable long-term position.

That’s where a financial planner can add value. Here at WKM, we can ensure you’re focused on your long-term retirement strategy, while giving you the confidence to maximise your allowances in the here and now.

If you have a large pension pot, are set to retire in the next decade, or are in the process of organising a pension withdrawal, we can:

• Help you maximise the opportunities presented by the LTA charge removal
• Review the tax efficiency of your plans with the most up-to-date legislation in mind
• Adjust your bespoke retirement strategy according to the new reforms
• Plan for future legislation changes, and how they might affect your wealth.

Advice could help you make the most of this and any other chances you have to grow your wealth as you approach retirement.

Get in touch

Are the chancellor’s LTA reforms likely to affect your retirement plans? Email info@wkmwealth.co.uk or call 0116 403 0138.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.