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The lifetime allowance (LTA) was, until recently, a “cap” on the total value that you could hold in your pensions without facing a tax penalty. Since 6 April 2023, however, the LTA has been abolished by the Chancellor. This caught many analysts (and financial planners!) by surprise and it raises important questions. Why was the LTA abolished? What does it mean for those building up retirement savings? Is the LTA likely to return in the future and, if so, in what form? Below, we explore these questions in more detail. We hope this content is useful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
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Why was the lifetime allowance abolished?
In his 2023 Spring Statement, Chancellor Hunt announced that the £1,073,100 LTA (lifetime allowance) would be scrapped from the start of the 2023-24 tax year. The reason given was to try and encourage more NHS workers – particularly GPs and other doctors – to remain in the service. Until recently, many higher-earning health workers were breaching their LTA often without realising it. To avoid punitive tax penalties, many doctors were retiring earlier than they originally planned.
In 2023, the UK government faces a worker shortage across the country. Many businesses have struggled to fill vacancies since the COVID-19 pandemic, which led many older workers to retire early. This is leading many businesses to raise salary offers to try and attract the limited talent available (which, in turn, is not helping the UK’s high inflation problem – 11.1% at present). To try and help control inflation, raise national productivity and protect income tax revenue, therefore, the government is taking action to incentivise work.
What does the LTA abolition mean for me?
If you currently have pension savings over the previous LTA (£1,073,100), then its abolition is likely good news for you. In 2023-24, you can make lump sum withdrawals from your pension over the 2022-23 LTA without facing a 55% tax charge (or, 25% if taken as income). However, many people face pressing questions about the LTA to discuss with their financial adviser.
In particular, what should you do if you previously halted your pension contributions (or lowered them) to avoid breaching the LTA? Should you now restart them? For those who already have maintained their LTA with fixed protection, things are complicated. If you make further pension contributions in 2023-24, for instance, then you are likely to lose your fixed protection. Others will be wondering what the LTA abolition means for their inheritance tax (IHT) plan. After all, you can pass down pension funds to beneficiaries, IHT-free, after your death. Now that the tax-free “limit” on pension wealth has effectively been removed, should you move more of your investments and savings into your pension to limit a future IHT bill?
These a difficult questions which typically require professional advice to account for your unique financial situation and goals.
What is the future of the lifetime allowance?
The future is uncertain. Nobody knows how long the LTA abolition will last or, if it returns, what form it might take. It is worth noting that the Labour Party has stated that it will bring back the LTA if it wins the next general election (although some flexibility may be retained for doctors). They have called its abolition the “Wrong priority, at the wrong time, for the wrong people”. There is also no guarantee that the Conservative Party will stay committed to the policy. For instance, if former “red wall” MPs in the party see the policy as unpopular with constituents, then they may oppose it to try and retain their seats.
This makes it difficult to forge a long-term plan in light of the LTA abolition. For instance, if you transfer large sums of wealth into your pension(s) above the 2022-23 LTA, could this leave you vulnerable to tax in the future if the LTA is reinstated? Quite possibly. Alternatively, what if the LTA abolition is retained for years to come? Could you miss an opportunity with your IHT plan if you did not move more wealth into your pension(s)? Nobody knows the answer.
As a general rule, it is a good idea to keep financial options open for yourself in later life, using a wide range of tax planning “tools” (e.g. pensions, ISAs and tax-efficient investment “vehicles”) to minimise needless tax liabilities. It is important to remember, moreover, that the main priority with financial planning is not to reduce or eliminate taxes. Rather, it is to help you achieve your goals such as enjoying a long, comfortable retirement or leaving a meaningful legacy to your children when you die.
Whether or not the LTA abolition will help retain NHS workers – or attract early retirees back to work – is unclear. Time will tell whether the policy is effective.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk