Abolition of the LTA: What employers need to know

Background

The new tax year has brought with it the abolition of the pension Lifetime Allowance (LTA). Announced by the Chancellor in the Spring Budget last year, and effective from 6th April 2024, it removes the cap on the total value of pension benefits that can be accrued without incurring extra tax charges.

The new rules and tax regime have implications for UK company pension administrators and for their higher earners.

Below we have outlined a summary of the things employers should be aware of and how the changes may affect current pension arrangements.

Key points

• From 6th April 2024, the pension Lifetime Allowance (LTA) has been abolished and a new set of rules for the taxation of lump sums and lump sum death benefits introduced.
• A new “lump sum allowance” of £268,275 and a new “lump sum and death benefit allowance” of £1,073,100 have been created.
• Discussions with employees with existing LTA protections should take place, as they may be able to re-join pension arrangements with their existing higher pension allowances remaining in place (provided they applied for the protection before 15 March 2023).

The LTA – a reminder

The Lifetime Allowance was the maximum amount of tax-relieved pension savings that an individual could make over their lifetime (£1,073,100 at 5th April 2024). On introduction in 2006 and each time it was reduced by successive governments, individuals with savings in excess of the latest allowance were able to apply to retain a higher, “protected” LTA.

In some cases an individual would lose their LTA protection if they made further pension savings and a charge became payable. Until 6th April 2023, the LTA charge was 55% where the excess was taken as a lump sum, and 25% where the excess was taken as pension. However, starting 6th April 2023, the LTA charge was reduced to the individual’s marginal tax rate, as a precursor to the abolition of the LTA in 2024.

What has replaced the LTA?

Although from 6th April 2024 the LTA has been abolished, there remains an overall Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA) which have been set at the pre-April 2024 Pension Commencement Lump Sum

(PCLS) limit (£268,275) and LTA (£1,073,100), respectively.

These are fixed allowances and are not currently due to change in line with inflation, so they are expected to lose value over time. Any lump sums paid which exceed either limit will be taxed at the recipient’s marginal rate except where LTA protections may apply. The allowances will be personal, rather than applying at a scheme level, and will not take into consideration the payment of regular pension income. Existing LTA protections will remain relevant, as they will give the individual potentially higher PCLS and LSDBA allowances.

What should employers do?

Employers should identify and talk to those affected by the change so that they are aware of the situation and can seek financial advice if necessary.

As these rule changes also affect registered group life assurance policies, employers should review their scheme setup.

It is also advisable to update any employee comms which refer to the LTA.

HMRC has published an update for pension scheme administrators on a range of issues, including the abolition of the lifetime allowance (LTA), together with some FAQs. (HMRC – Abolition of the Lifetime Allowance – FAQs)

What now?

If you have any questions about how the above changes may affect your company pension scheme and its administration, please feel free to get in touch with us.