Paul Crichton
The latest Finance Bill will legislate the announcement in the Spring Budget that the lifetime allowance (LTA) charge will be abolished from 6 April 2023. Individuals will still be able to receive 25% of their pension savings as a tax-free lump sum when they become entitled to their pension benefits. From 6 April 2023, for most individuals, the tax-free amount will be capped at £268,275.
The £268,275 limit represents 25% of the 2022/23 LTA of £1,073,100. The LTA has changed many times over the years and has been as high as £1.8 million. This is a complex area, but taxpayers have been able to elect to protect their LTA at the higher amount. HMRC has confirmed that individuals who hold valid LTA protection can access a tax-free lump sum of more than £268,275. The exact amount will depend on which protection they hold.
Those who made a successful enhanced protection or fixed protection application prior to 15 March 2023 can also resume contributing to their pension scheme from 6 April 2023 without losing their protection. They are also able to enrol in new workplace pension schemes and transfer money between pension schemes from 6 April 2023 without losing LTA protection.
As a result of the pension reforms introduced by George Osborne which took effect from 6 April 2015, a drawdown pension fund has become an important part of estate planning. The fund itself is not subject to inheritance tax, and where the pensioner dies under the age of 75, there is no charge when the beneficiary draws the remaining capital. Where the pensioner dies over the age of 75, then the beneficiary is taxed at their marginal tax rate on any amounts drawn.
Where an individual has both ISA savings and a drawdown pension fund, they would generally be recommended to spend their ISA savings in priority to drawing down on their pension, as the ISA is subject to inheritance tax whereas their pension fund is not. Again, this is an area where specialist advice is required, but it should be noted that where the pension fund is used to buy an annuity, the annuity will lapse on the death of the annuitant unless a joint-life annuity is purchased.