The government has issued the new Finance Bill which contains provisions to formally abolish the lifetime allowance (LTA) on pensions.
The abolition of this LTA was initially included in last year’s Spring Budget, and was largely seen as a reaction to staff issues in the NHS with some senior doctors not taking on additional overtime shifts that potentially triggers a tax charges for exceeding the LTA limit.
While this move has been widely welcomed by many in the pensions industry a number have pointed out that this won’t necessarily simplify the pensions system. The legislation to abolish the LTA runs to 100 pages and introduces two new key allowances.
These are the lump sum allowance — set at £268,275 – a quarter of the current £1,073,100 LTA. This is the maximum someone can take as a tax-free lump sum (unless they have protection). This replaces the old rules that allowed people to access 25 per cent of their pensions as a tax free cash lump sum.
The government is also introducing a ‘lump sum and death benefit allowance set at £1,073,100 – incorporating both tax-free lump sums someone takes while alive and lump sums paid on death.
There are also a host of ‘transitional arrangements’ for those who have taken some benefits before 6 April 2024 and how those are taken into account in working out how much allowance an individual has remaining, if any.
Nucleus Financial technical services director Andrew Tully says: “The complexity of these new rules reaffirms our view that we should take more time before introducing such a major change to legislation.”
He adds that the industry has around four months to change systems and literature and communicate these changes to stakeholders. He says this is likely to result in poor customer outcomes with some people assuming they will still be able to take a quarter of a larger pension fund as tax free cash.