"Many savers with protected lump sums will have been wondering whether, if they resumed contributions to take advantage of the vanished LTA, they would have to give up their protected lump sum"
Chancellor Jeremy Hunt abolished the pensions lifetime allowance in Wednesday’s Budget. The government later confirmed that the maximum amount which a member can take as a pension commencement lump sum (PCLS) will be frozen at £268,275 — 25% of the current standard lifetime allowance of £1,073,100.
However, it was unclear how the changes applied to those who had taken out fixed protection against historical reductions in the LTA – particularly as it was uncertain whether they would retain access to the full tax-free lump sum from their protected pot, or whether they would have to submit to the new capped lump sum of 25% of current LTA.
Some extra clarity was released yesterday by HMRC, who said that members with a protected right to a higher PCLS will continue to be able to access this right.
However, Gary Smith, partner in financial planning at wealth manager Evelyn Partners, says that pension holders should proceed with caution: “First, it’s worth pointing out that someone with LTA protection should probably refrain from immediately renewing pension contributions in the current tax year, as the existing regime is still in place and that could mean they sacrifice their protection, possibly without the benefits of the new regime.
“Second, the tax-free lump sum under the new regime will be capped at an absolute maximum of £268,275 - equivalent to 25% of the current LTA - from the next tax year and thereafter. So many savers with protected lump sums will have been wondering whether, if they resumed contributions to take advantage of the vanished LTA, they would have to give up their protected lump sum and submit to the cap.
“The answer, for the moment, seems to be no – for the next tax year HMRC have said that they will retain entitlement to their protected lump sum. However, there is a chance that this could be an interim arrangement, as the details around the new pension rules will not be finalised until a Finance Bill for the tax year 2024/25. And there is no guarantee the 2023/24 rule will be carried forward, although it would be troublesome if it wasn’t.
“So a great deal of uncertainty remains over how the removal of the LTA will play out – uncertainty that is somewhat exacerbated by Labour’s pledge to reinstate the LTA if it gains power after the next General Election. What level will the LTA be at then? Will people who have contributed more in the following tax year and the one after find themselves penalised for then being on the wrong side of the LTA?
“While we broadly welcomed the lifting of the LTA, these unknowns are detrimental to forming coherent and robust financial plans, and will make it difficult for some savers to plot the best course of action. We really do recommend that people with pots close to or above the LTA, or who have fixed protection in place, seek advice from a financial planner.
“Third, HMRC also offered some detail on other sorts of lump sum. From 6 April, lump sum pension benefits in excess of the lifetime allowance which would currently be subject to a 55% charge, will then be taxable at the recipient’s highest marginal rate of tax.
“So this includes lump sums taken in the case of death or ill health of the pension holder, but also lump sums taken by the saver in excess of the LTA. Under the existing rules, if someone with a pension pot greater than the LTA crystallised the whole pension they would be taxed at 25% if the funds were taken as an income, i.e. placed into drawdown, or 55% if taken as a taxed lump sum.
“However, under the new rules, if taken as drawdown the charge will now be 0% but if taken as a taxed lump sum, it will be charged at the member’s highest marginal rate.”
