Articles - Whats next for Lifetime Allowance clients

The Chancellor’s 2023 Budget announcement triggered significant changes in the pensions sector. Among these changes, some stand out as particularly noteworthy. While many anticipated the rise of the standard pension annual allowance from the current £40,000 to £60,000, that came into force in April 2023, the true surprise came with the abolishment of the Lifetime Allowance (LTA) charge.

 By David Downie, Managing Director (SSAS & Actuarial), WBR Group

 Previously, this charge was incurred when a pension fund's total value exceeded £1,073,100. The pensions sector had expected the threshold to increase but it certainly didn’t expect the total abolition that was announced.

 The LTA is a mechanism by which the UK tax system limits the maximum amount of tax privileged benefits that can be enjoyed from an individual’s pension scheme. The LTA threshold only becomes relevant when a pension scheme member starts to draw their pension benefits or they reach the age of 75, whichever comes first. These events are known as benefit crystallisation events (BCE).

 Another instance of a BCE is the transfer of a pension fund to a Qualifying Registered Offshore Pension Fund (QROPS). As this is a transfer of uncrystallised rights there is no LTA charge payable on the transfer, but it will be subject to the overseas transfer charge.

 The scheme administrator will deduct the amount of the overseas transfer charge before transferring the remaining funds to the QROPS scheme manager. In effect, this transfer has the effect of absorbing all or part of the LTA. Once the entire LTA value is exhausted, the payment of any excess benefits will give rise to a tax charge on the pension scheme trustees. The current rate is 25% for income benefit payments and 55% for capital payments.

 The abolition of the LTA removes the need for the pension fund member to concern themselves with the overall value of their pension pot. But, the LTA still plays a role in calculating the pension commencement lump sum (PCLS), which is the maximum tax free cash available when someone retires. The PCLS is limited by the lower value of either 25% of the member's uncrystallised pension rights or 25% of their available LTA. So, the LTA does still limit the amount of tax free cash available to the pension scheme member.

 Interestingly, the Labour Party has already stated that it intends to reverse the abolition of the LTA if it comes into power. This potential reversal raises questions about whether there is currently a window of opportunity for pension members to seize and make additional contributions. But there is also the question of whether there is even a window. Could a reversal of the abolition of the LTA have retrospective effect so that the change would be read as though nothing had ever happened?

 The likelihood of this scenario seems minimal, as it would be a very difficult for a newly elected Government to increase tax with retrospective legislation. The real peril lies in the erosion of credibility and trust within the system, which underpins the nation's administrative and economic structure. Retrospective changes to laws create ambiguity about the current legal framework, making it impossible for the UK population to adhere to constantly shifting rules.

 Although there are instances of retrospective tax changes, such cases are typically extreme and are justified by the need to counter financial risks from tax avoidance. The 'Rees Rules' established in 1978 outline an acceptable approach to such changes. The adjustments made in 2004 to counter employment income tax avoidance schemes raised concerns about surpassing these rules, but official statements indicated a desire to remain within their boundaries.

 Likewise, changes implemented in 2008 to address double taxation treaty exploitation were considered by some as retrospective and exceeding government authority. The Government defended these changes by asserting they clarified existing law rather than introduced new ones. Similarly, the 2019 Loan Charge was criticised for its retrospective nature.

 However, these cases are distinct from the abolition of the Lifetime Allowance Charge. Unlike the previous cases, there is no consensus—neither political nor economic—regarding whether the limit should be retained, altered, or abolished. Once abolished, the legal landscape becomes unequivocal: the LTA tax charge, regardless of anyone's plans, ceased to be effective from 6 April 2023, as the Finance (No.2) Act 2023 received royal assent on 11 Jul 2023.

 Retrospectively reinstating the LTA would entail a radical departure from an established position and would surpass not just the Rees Rules but obliterate them. Comparing this change to previous anti-avoidance measures is a misjudgment. It is crucial that any potential reversal of the LTA abolition includes a "grandfathering" provision to safeguard those who benefited from the temporary absence of the cap through legal means.

 Ultimately, while governments hold the power to enact changes, the ramifications of disregarding established legal principles could usher in a disturbing new era.


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