Changes to the Lifetime Allowance
Following the changes to the Lifetime Allowance ("LTA") regime effective from 6 April of this year, we have some more clarity on how these changes will operate in practice and on the implications for individuals with Enhanced Protection or any of the Fixed Protections. In this briefing we highlight three key points.
1. Accrual and more for persons with protection
Prior to 6 April 2023, a condition of maintaining enhanced or fixed protection was that the individual could have no further pension benefit accrual, including (except in limited circumstances) through the provision of registered scheme death in service cover.
The 6 April changes mean that individuals whose protection was in already in place on 15 March 2023 can recommence pension accrual should they wish without jeopardising their protection. These persons can once again benefit from death in service provision through registered schemes, and a key difference for trustees to note is that these members can be included in bulk transfers and bulk GMP equalisation exercises without causing a loss in protection.
Trustees and employers will want to consider the extent to which scheme rules and/or employment contracts put in place restrictions or exclusions relating to the LTA which may not now be necessary or desirable.
2. Continuing need for protections
Despite the removal of the LTA tax charge on excess savings over the LTA, enhanced and fixed protections remain valuable because of the access these protections give to increased tax-free lump sums. For example, an individual with Fixed Protection 2012, which gives a personalised LTA of £1.8 million, will be entitled to a tax-free lump sum on retirement equal to the lower of i) 25% of the value of his or her pot, and ii) £450,000 (being 25% of £1.8 million). Without any form of protection, the maximum tax-free lump sum now available is £268,275.
The position is slightly different for someone with a protected tax-free lump sum. For these individuals, accrual post-5 April 2023 is not taken into account in calculating the tax-free cash entitlement. An individual with Enhanced Protection and lump sum protection of, for example, 40% will be entitled to a tax-free lump sum on retirement equal to the lower of i) 40% of the value of his or her benefits on 5 April 2023, and ii) 40% of the value of his or her benefits at retirement.
3. Tax charges on lump sums
For the time being at least, testing against the LTA for lump sums remains necessary. There were situations prior to 6 April where certain lump sums were subject to an LTA tax charge. For example, payment of a serious ill-health lump sum or a defined benefits lump sum in excess of the LTA. The amount above the LTA was subject to an LTA tax charge at a rate of 55%.
From 6 April the LTA tax charge no longer applies and instead the value of such payments in excess of the LTA will be subject to income tax at the recipient's marginal rate. Normal PAYE rules now apply to these payments which should be treated as pension income.
This briefing provides only a short summary of the continuing relevance of the LTA and is not intended to be a comprehensive guide. Trustees, sponsoring employers and scheme members will want to take advice on a case-by-case basis. Please do not hesitate to contact us should you wish to discuss any of the issues raised in this briefing.