Stealth taxes and changes to Pension Lifetime Allowance

Autumn (Statement) Reflections

As always, no market forecasts or political commentary following Jeremy Hunt’s Autumn statement, but you may be as confused as we are when to hear “tax cuts” (National Insurance) and then cross reference these with the freezing of Income Tax and Inheritance Tax allowances and the reduction in Capital Gains Tax allowances.

We are in the midst of some penal “stealth taxes” i.e. what is termed fiscal drag and experiencing the biggest tax-raising parliament on record (fact).

Moving on, there was some important clarification regarding pensions which may affect many of our clients and possibly you.

Pension Lifetime Allowance

The government confirmed the abolition of the pension lifetime allowance with effect from 6th April 2024, but at the same time introduced two limits on pension payments that can be made free of tax.

  1. A lump sums and lump sum death benefits allowance of £1,073,100.
  2. A tax-free cash limit, known as a lump sum allowance, of £268,275. This will count towards the overall limit above and will include the tax-free element of uncrystallised funds pension lump sums.

If you are under the age of 75 check your pension death benefit nominations

This is crucial and may impact you if you have an old pension contract or you are a deferred member of a company pension scheme (defined contribution).

Many of these plans do not offer the option of “beneficiary drawdown”, in simple terms, the flexibility for the pension to be inheritable and for your chosen beneficiaries to continue to draw form the pension.

Why is “beneficiary drawdown” so important?

If your current pension simply pays a lump sum (assuming you die before reaching age 75), worst case scenario the pension could be added to other assets in your estate and potentially attract Inheritance Tax (IHT).

Alternatively, if it’s paid as a lump sum, but outside of your estate, you may have created an Inheritance Tax problem for your surviving spouse/partner. That’s because these pension death benefits will no longer enjoy the IHT exemption they would have done if they’d remained within a pension wrapper.

Additionally, if like many of our clients, your total pensions (for the purposes of calculating how much pension lifetime allowance has been used) come close to or exceed the £1,073,100 figure, the payment of a pension lump sum death benefit could trigger an income tax charge on the beneficiary.

The solution to many of the above problems is to ensure your pension offers beneficiary drawdown.

The usual caveats also apply in terms of weighing up whether you need to make changes now e.g. If you transfer your pension, would you be giving up any valuable guarantees with your existing arrangements.

To ask a question or arrange a second opinion meeting, please complete the form below or call 01825 76 33 66.

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.