This last fiscal Statement of 2023 has been and gone without a great deal of fanfare. The Chancellor announced various measures designed to stimulate growth in the economy. These included:
- Cuts to National Insurance for employees from 6 January 2024 and the self-employed from 6 April 2024.
- Confirmation that the State Pension triple lock will be maintained, guaranteeing the 8.5% earnings-based increase for next April.
- Relaxation of ISA rules, removing the ‘one ISA of each type per tax year’ restriction from April 2024. This simplification will mean investors will be able to subscribe to multiple cash or stocks and shares ISAs in a year without fear of invalidating their subscriptions leading to a loss of tax-free status on their savings.
- From April 2024 it will also be possible to do partial transfers of current tax year ISA funds.
- The age at which an adult ISA can be opened will fixed at 18 across all ISA types from April. This will mean it will no longer be possible to open an adult Cash ISA at age 16, removing the ability for 16- and 17-year-olds to pay £29,000 into ISAs by combining contributions into both a Cash ISA and Junior ISA.
- The announcement of a new ‘pot for life’ pension consultation.
However, despite the rumours around inheritance tax, there was no mention of any changes to this area of taxation. With a further Budget due in Spring 2024, there could be one more major economic event before the next general election where the Chancellor of the Exchequer can make changes to the tax system. This could enable tax changes in areas untouched this autumn.
But for now, whilst one may say ‘no news is good news’; we need to remember that a big change is already on the way following the earlier announcement of the abolition of the Lifetime Allowance (LTA) in the Spring Budget. Subsequently, there was much speculation about what a post-LTA abolition world would look like and after a 3-month industry consultation over the summer, draft legislation was laid out in the Finance Bill 2023/24. Further amendments to this were released in the Autumn Finance Bill, published on 29th November. Here, we look at the finer details of what to expect for the 2024/25 tax year.
Update on the abolition of the Lifetime Allowance (LTA)
- The LTA is frozen at the current level of £1,073,100 for 2023/24 and will be effectively abolished from 6 April 2024.
- Maximum tax-free cash lump sum remains unchanged however for 2023/24 (where no LTA protections are in place) at the lower of 25% of the amount crystallised, or 25% of the individual’s remaining LTA, with overall maximum tax-free cash of £268,275.
- In 2024/25, two new allowances come into play – the Lump Sum Allowance (LSA) and the Lump Sum & Death Benefit Allowance (LS&DBA). The limits are to remain frozen at £268,275 (LSA) and £1,073,100 (LS&DBA) for 2024/25 for those without protections.
- In a previous policy document, there had been mention that on the death of the member, inherited Defined Contribution pension funds used by beneficiaries to go into drawdown or to buy an annuity would become taxable – however, that decision has been reversed. There will be no change to the tax treatment of inherited pensions where the member dies before age 75. This is a much welcomed U-turn.
- New type of taxable lump sum – The lifetime allowance excess lump sum, where money taken over the LTA as a lump sum, less the 55% LTA charge, will be abolished, but there will be a new lump sum introduced – the pensions commencement excess lump sum, which will be taxed at the individual’s marginal rate. This is expected to be used under schemes that provide a right under their rules to a level of tax-free cash greater than the member’s available lump sum allowance.
- Triviality and small pots – In another change of stance, the tax-free element of trivial commutation lump sums, winding-up lump sums, and small pot commutations will not reduce the new allowances, though you will need allowance available to take these lump sums.
- Individuals with LTA enhancement factors will retain their rights to higher tax-free element of any serious ill-health lump sums and lump sum death benefits, where entitlement to the enhancement arose before 6 April 2024.
- From 6 April 2024, the old benefit crystallisation events (BCEs) will be removed and replaced with relevant benefit crystallisation events (RBCEs) which will cover the payment of relevant lump sums and lump sum death benefits.
- Transfers overseas – While the LTA will be abolished, for transfers from a UK scheme to a QROPS (Qualifying Recognised Overseas Pension Scheme), uncrystallised funds will be tested against a new overseas transfer allowance, which will be set at the same level as the individual’s lump sum and death benefit allowance. If the transfer overseas exceeds this, the excess will be chargeable.
- Availability of the new allowances – There will be a transitional calculation for those who have taken benefits before 6 April 2024, to work out how that will affect the new allowances. Full details are not yet provided, but members with accurate records of previous tax-free amounts taken will be able to use that information as an alternative transitional calculation. Individuals who have already used up 100% of their LTA will have exhausted their allowances.
Pension rules continue to be complex area of financial planning. For any further advice in relation to retirement planning and wealth management, please get in touch with our Chartered Financial Advisers.