The abolition of Lifetime Allowance for UK
pension savers comes into effect

In last year’s spring budget, the Chancellor revealed plans to abolish the Lifetime Allowance (LTA) for pension savers in the United Kingdom. But what is the LTA and how does this new policy affect you?

The LTA ‘was’ a cap applied to the total benefit that a person could accumulate and withdraw from UK registered pension funds. For amounts above this cap, pension savers could have been liable to a tax charge.

The cap will be completely removed from April 2024, allowing pension members to continue to contribute as much as they like to their retirement pot, depending on the rules around maximum annual members’ contributions.

The tax-free contribution limit for Defined Contribution (DC) pension schemes is currently set at £60,000 per annum (2023/24 tax year). Exceeding this limit incurs tax charges.

The available allowance varies based on the total earnings of the individual. Furthermore, any unused allowances from the two previous tax years can be brought forward to use in the current year.

Adjusting or removing this cap can influence retirement savings behaviour and investment patterns. This is a noteworthy particularly during an era where individuals are being encouraged to create their own nest egg to cover retirement.

The UK government is constantly looking for ways to encourage longer-term, patient capital investment in the UK marketplace. The confirmation of a tax-free British Individual Savings Account (ISA) comes at an opportune moment. This new ISA offering could allow consumers to drive up to £5,000 into UK businesses, including stocks and bonds, with no tax implication on income or gains.

These policy decisions, whilst being of great potential benefit to the pension saver, feed into achieving the UK’s wider fiscal goals.

Speculation

The removal of associated limits on tax-free contributions to DC schemes has also received significant attention. DC pension schemes include workplace or occupational pensions, personal or private pensions, Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs), where the pension member, along with a sponsoring employer, make contributions to the fund.

The Royal Mint can facilitate pension investment into investment-grade bullion bars.

Sources

• Outlook: Will pensions get a free pass in this week's Spring Budget? (professionaladviser.com)
• Pension tax relief: The annual allowance and lifetime allowance - House of Commons Library (parliament.uk)
• What is the pension lifetime allowance and how does it work? | unbiased.co.uk
• https://www.theguardian.com/uk-news/2024/mar/06/british-isa-will-be-created-to-encourage-investment-in-uk-firms-hunt-confirms
• https://www.royalmint.com/invest/gold-for-pensions/pensions-changes-take-effect-in-new-tax-year/

Notes

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