Of all the key announcements from March’s spring Budget, arguably the most surprising was the abolition of the Lifetime Allowance (LTA).
Having previously teased a rise to the threshold, Jeremy Hunt instead used his Budget statement to scrap the limit altogether, a controversial move with implications not only for your pension saving but for your estate planning too.
Keep reading for more on what the LTA was, what the new rules are, and why they may have created an Inheritance Tax (IHT) shelter for your pension wealth.
The LTA limited the amount you could withdraw from your pensions during your lifetime
During the 2022/23 tax year, the LTA stood at £1,073,100. That meant you could make pension withdrawals up to this amount without occurring an additional charge.
The LTA charge stood at 55% for funds exceeding the allowance that you chose to take as tax-free cash. If you opted for income, the charge was reduced to 25%.
While the LTA technically still exists (it won’t be officially abolished until April 2024), the charges have been removed and there is no longer a penalty for exceeding the LTA.
Jeremy Hunt also used his Budget to increase the Annual Allowance – the amount you can contribute to a pension each year while still benefiting from tax relief. It had stood at £40,000 but has now risen to £60,000.
Interestingly, the maximum pension commencement lump sum (PCLS) – assuming you don’t have any form of HMRC protection – will stay at £268,275, which is 25% of the “current” LTA.
These changes clearly have huge implications for your tax-efficient pension saving. What might be less clear, though, is what they have to do with your estate planning…
Unused pension wealth usually sits outside of your estate for IHT purposes
The LTA is crucial to your inheritance planning because unused pension pots usually remain outside of your estate. This means that they won’t figure in HMRC’s IHT calculations.
Unused pension wealth can be passed on to your chosen beneficiary with no IHT to pay, and completely tax-free in some circumstances.
The tax treatment will depend on how old you are when you die.
In the event of your death before reaching the age of 75, your unused pension fund can be passed to your chosen beneficiary, tax-free.
On death after age 75, your beneficiary can still receive your unused funds, but they will be taxed at the highest rate of tax they pay.
It’s important to remember that a pension beneficiary is named using an “expression of wish” form, via your pension provider, instead of through your will.
The form, as the name suggests, makes your wishes known. But the ultimate decision on where your money goes will be made by the pension scheme trustees.
Long-term retirement planning should consider all of your income streams
A successful long-term financial plan will help you to reach your retirement goals, allowing you to live your desired lifestyle after work. Your plan does this by considering all of the pension and non-pension income at your disposal.
Alongside your workplace and personal pensions, you’ll have your State Pension entitlement. You might also have investments, in a Stocks and Shares ISA, for example, and regular rental income from buy-to-let properties.
Using non-pension income to fund your retirement, if you can afford to, has several advantages:
- The pension pots that you don’t touch remain outside of your estate for IHT purposes, lowering your potential liability.
- You might be able to pass pension wealth on tax-efficiently on death, as discussed above.
- Your unused pots provide an excellent contingency if later-life care is required.
It’s important to remember that your expenditure in retirement won’t be regular. Instead, it will fluctuate. And while it might not be a pleasant thing to consider, acknowledging that you might require care in later life allows you to plan for it.
If you can afford to leave some of your pension pots untouched, deep into retirement, consider doing so. You’ll have peace of mind that your care costs could be covered if needed, and that the money will be passed on tax-efficiently if care isn’t required.
And with the increased limits on tax-efficient pension saving and the abolition of the LTA, your pensions just became a more attractive investment vehicle than ever.
Get in touch
If you would like to discuss how to make the best use of the pensions you hold, as part of your retirement or estate planning, we’d be very happy to help. Please contact us at info@janesmithfinancial.com or call 01234 713131.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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