In his Budget in March 2023, the Chancellor announced the discontinuance of the Lifetime Allowance Charge from 6 April 2023 and the intended abolition of the Lifetime Allowance (‘LTA’) from 6 April 2024. The LTA was a limit on the total tax-favoured retirement savings a member could accrue during their lifetime. Any retirement savings in excess of this limit (which was £1,073,100 for the 2022/2023 tax year) were subject to an additional tax charge (the ‘LTA Charge’).
Further legislation has now been enacted to remove the LTA from 6 April 2024. Instead, two new allowances have been introduced from 6 April 2024 to restrict the amount of tax-free lump sum benefits payable at retirement and on death. These are the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance.
Retirement
As a member, you will usually be entitled to take up to 25% of your individual account in the Plan as a tax-free lump sum, but this is subject to you having sufficient available Lump Sum Allowance and Lump Sum and Death Benefit Allowance.
The standard Lump Sum Allowance is currently £268,275 and the standard Lump Sum and Death Benefit Allowance is currently £1,073,100. For members with protection certificates from HMRC, the allowances may be higher.
Each time you take a tax-free lump sum benefit from a registered pension scheme, your available Lump Sum Allowance and Lump Sum and Death Benefit Allowance will be reduced by the amount you take. If you have insufficient available Lump Sum Allowance and Lump Sum and Death Benefit Allowance when you come to retire from the Plan, then your tax-free lump sum will be restricted to what you have available.
If you elect to take your entire individual account in the Plan as a lump sum (known as an Uncrystallised Funds Pension Lump Sum) then, subject to you having sufficient Lump Sum Allowance and Lump Sum and Death Benefit Allowance available, 25% of your savings would be paid tax-free with the remaining 75% being liable to income tax at your marginal rate. If you elect to take your individual account in the Plan via multiple lump sums, then typically each instalment you take would comprise 25% tax-free with the remaining 75% being taxed at your marginal rate of income tax (though the tax-free component of each instalment would be tested against your available Lump Sum Allowance and Lump Sum and Death Benefit Allowance).
If you take a tax-free lump sum in respect of part of your individual account and designate the balance of your savings to a flexible access drawdown arrangement (for which you’d need to transfer-out of the Plan), any drawdown income payments taken will be liable to income tax at your marginal rate . Likewise, if you use the balance of your individual account to purchase an annuity (i.e. pension), then the income from the annuity will be taxed as earned income in line with your marginal rate of income tax and the annuity secured would not count towards your Lump Sum Allowance and Lump Sum and Death Benefit Allowance. Only the tax-free lump sum would be assessed against the allowances.
Death
As a member, if you die prior to retirement the investment value of your individual account in the Plan is usually paid as a lump sum death benefit to your nominated beneficiaries (subject to the Trustee’s discretion). If you’re an active (i.e. contributory) member of the Plan at date of death, an additional insured lump sum (based on a multiple of your annual basic pay) is also usually payable on the same basis (subject to any terms and conditions imposed by the insurer).
Generally, any lump sum death benefit payable from the Plan is tax-free up to your available Lump Sum and Death Benefit Allowance at date of death. Any lump sum death benefit payable from the Plan that exceeds your available Lump Sum and Death Benefit Allowance at date of death would be subject to income tax at your beneficiary’s relevant marginal rate.