A financial plan maps out the journey that your clients will embark on over the course of their lives. One that may encompass years or decades with the eventual goal of helping them unlock their dream lifestyle and desired level of retirement.
Recently, the UK’s chancellor Jeremy Hunt announced the government’s spring Budget and the news had some significant ramifications for your clients’ potential retirement plans. One of the major developments was the government’s decision to effectively abolish the Lifetime Allowance (LTA).
Read on to discover what the LTA is and why the scrapping of the policy may be good news for your clients.
The LTA set the upper limit for how much your clients could accumulate in their pension tax-efficiently across their lifetime
The LTA refers to the maximum amount of benefits your clients can save into their pensions (workplace or personal) over the course of their lifetimes without paying an additional tax charge. For the 2022/23 tax year this figure was set at £1,073,100.
According to HMRC, the number of people breaching the LTA increased by 21% between the 2018/19 and 2019/20 tax years (the latest set to be analysed), leaving many Brits exposed to potential tax liabilities.
Your clients’ benefits are only tested against the LTA if a benefit crystallisation event occurs.
There are a few potential benefit crystallisation events your clients might have faced, the most common of which were:
- Taking benefits
- Transferring to a qualifying recognised overseas pension scheme (QROPS)
- Reaching age 75
Once the LTA had been breached your clients would have typically either faced a 55% tax on excess pension funds withdrawn as a lump sum or 25% (plus Income Tax) if the funds were withdrawn as income.
However, following the government’s spring Budget announcement, this has all changed. Any crystallisation events above the LTA will now not incur LTA tax charges for the 2023/24 tax year and the LTA is due to be abolished in the near future.
The spring Budget has changed LTA rules and outlined its future abolishment
In a move to encourage soon-to-be, or recent, retirees to remain, or return, to work, Hunt moved to remove the LTA tax charge from the commencement of the 2023/24 tax year and outlined plans to completely abolish the LTA in a future Finance Bill.
Additionally, Hunt has moved to:
- Increase the Annual Allowance from £40,000 to £60,000
- Raise the minimum Tapered Annual Allowance from £4,000 to £10,000
- Boost the adjusted income threshold for the Tapered Annual Allowance from £240,000 to £260,000
- Increase the Money Purchase Annual Allowance (MPAA) to £10,000.
The changes to the LTA have opened up new opportunities for your clients to save in an incredibly tax-efficient manner.
The removal of the tax charges opens up ways for your clients to boost their retirement plans
According to a study by Royal London, 46% of non-advised individuals and 37% of advised reported being worried about being able to cope financially when they retire. The study also found that only 35% of non-advised and 42% of those receiving advice felt confident about their future.
Being able to maintain a sufficient income during retirement and sustain a decent standard of living is a worry that many soon-to-be retirees have to contend with.
Pensions are an incredibly tax-efficient way for your clients to save for their future retirements and reduce potential tax liabilities in the present. Previously many Brits may have opted to stop saving into their pensions and potentially made the move to retire in order to avoid breaching the LTA.
The recent government changes have removed this obstacle and allowed for greater pension savings to be set aside.
Saving into a workplace or private pension can have a range of benefits, such as:
- Pension contributions receive tax relief at your clients’ respective Income Tax rate (up until the Annual Allowance, which now stands at £60,000 for the 2023/24 tax year)
- Pensions can benefit from “compound returns” arising from potential returns being reinvested back into the pension helping to achieve long-term growth
- Workplace pensions can benefit from “free money” in the form of employer contributions, which are 3% as part of auto-enrolment, and could be more dependent on your client’s employer.
The removal of the LTA and the increase of the Annual Allowance means the positive benefits of contributing to a pension scheme have significantly improved. Working with a financial planner can help your clients assess the best options for their long-term plans and ensure they have enough saved away for their eventual retirement.
Get in touch
If your clients are curious how the changes to the LTA might benefit their long-term plans, they should get in touch for expert advice by emailing email@example.com or calling 0345 505 3500.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
This article is for information only. 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.