Changes from April 2023 relating to the abolition of the Lifetime Allowance

The Lifetime Allowance is essentially a cap on pension savings, and an additional tax charge (- the Lifetime Allowance tax charge) applies where the cap is exceeded.

From 6 April 2023, where the Lifetime Allowance is exceeded, it will no longer give rise to a Lifetime Allowance tax charge.

In addition, members who hold valid enhanced protection or any valid fixed protections will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection (provided this protection was applied for before 15 March 2023, and a certificate or reference number subsequently issued, from 6 April 2023).

Changes from April 2024 relating to the abolition of the Lifetime Allowance

From 6 April 2024, the Lifetime Allowance is to be abolished.

Tax-free lump sums will now be capped by two new allowances:

  • A lifetime allowance called the Lump Sum Allowance; and
  • A combined lifetime and death benefit allowance called the Lump Sum and Death Benefit Allowance.

The Lump Sum allowance has been set at £268,275 and the Lump Sum and Death Benefit Allowance has been set at £1,073,100.

However, higher allowances will be available for those with existing Lifetime Allowance protection.

The following lifetime tax-free lump sums will count towards an individual’s Lump Sum Allowance:

  • Pension Commencement Lump Sums;
  • the tax-free element of Uncrystallised Funds Pension Lump Sums; and
  • Stand-alone lump sums (- 100% tax-free cash rights).

The following lifetime tax-free lump sums will count towards an individual’s combined Lump Sum and Death Benefit Allowance:

  • Pension Commencement Lump Sums;
  • the tax-free element of Uncrystallised Funds Pension Lump Sums;
  • Stand-alone lump sums (- 100% tax-free cash rights); and
  • Serious Ill-Health Lump Sums.

The following tax-free death benefit lump sums also count towards an individual’s combined Lump Sum and Death Benefit Allowance:

  • Uncrystallised Funds Lump Sum Death Benefits;
  • Drawdown Pension Fund Lump Sum Death Benefits;
  • Flexi-access Drawdown Fund Pension Lump Sum Death Benefits;
  • Defined Benefit Lump Sum Death Benefits;
  • Pension Protection Lump Sum Death Benefits;
  • Annuity Protection Lump Sum Death Benefits; and
  • Winding-up Lump Sum Death Benefits.

However, Death Benefit Lump Sums paid from funds crystallised before 6 April 2024 do not count towards an individual’s combined Lump Sum and Death Benefit Allowance.

Anything exceeding the allowances will be taxed at the recipient’s marginal rate of income tax.

Yes.

Previously used-amounts will be calculated in one of two ways:

  • A default calculation – deducting 25%* of an individual’s Lifetime Allowance previously-used percentage amount (but based on a Lifetime Allowance of £1,073,100 or protected LTA, as applicable); or
  • By reference to a transitional tax-free amount certificate – which can be applied for, where individuals have used less of their Lifetime Allowance as tax-free lump sums than under the default calculation.

*But for Serious Ill-Health Lump Sums the deduction is 100% not 25%.

Yes.

An individual cannot apply for a certificate if they have already had a relevant benefit crystallisation event occur on or after 6 April 2024.

A relevant benefit crystallisation event would be payment of any of the lump sums which count towards the new tax-free lump sum allowances.

In addition, once a transitional tax-free amount certificate has been issued, it must be used, i.e. it is irreversible and the default calculation can no longer apply, even where it would give a better outcome.

Changes from 6 April 2028 relating to Normal Minimum Pension Age

Generally, NMPA is the earliest age at which you can draw benefits from a SIPP or SSAS (or other workplace and non-workplace pensions).

But individuals may be able to draw benefits earlier if they satisfied certain ill-health pension conditions or have a Pension Protected Age.

NMPA is being increased to age 57 from 6 April 2028 (- it is currently age 55).

In 2014, the government decided it would be appropriate for NMPA to be set at 10 years below state pension age. To coincide with the rise of state pension age to 67, NMPA is being raised to age 57.

No. You can continue to draw benefits from your drawdown fund.

From 6 April 2028, individuals will have had to attain age 57 to be able to draw benefits (unless they satisfy certain ill-health conditions or have a Pension Protected Age).

If you were born before 6 April 1971, you will be unaffected (as you will have reached age 57 by 6 April 2028).

If you were born after 5 April 1973, the earliest age you can draw benefits is now age 57.

If you were born between 5 April 1971 and 5 April 1973, you can draw benefits once you reach age 55 until 5 April 2028. Thereafter, from 6 April 2028, you will have to wait until you reach age 57 to draw more benefits.

A Pension Protected Age is the right to draw benefits before NMPA.

An individual will have a PPA where they had an ‘unqualified right’ to take benefits before age 57 on 11 February 2021 (or joined a scheme with an ‘unqualified right’ before 4 November 2021.

An ‘unqualified right’ is one that doesn’t need anyone’s consent (like an employer or trustee) and made explicit (not implied) reference to age at which benefits could be taken, e.g. from age 55 (and not from NMPA).