The announcement that the UK Lifetime Allowance (LTA) would be abolished immediately, confirmed in the March Spring Budget, undoubtedly received a positive response from pension savers, financial advisers and those who had previously expected to attract heavy tax obligations of up to 55% of their retirement wealth.
However, lifetime allowance specialist Malcolm McDowell, Private Wealth Manager at Chase Buchanan Wealth Management, advises that caution may be necessary, with a range of caveats and possible considerations that mean the time to react is short.
Repercussions of Changes to the Lifetime Allowance
Before this tax year, HMRC was responsible for levying LTA tax charges, based on a 25% tax obligation, in addition to income tax, for pension benefits accessed that, accumulatively, exceeded the £1.073 million threshold. Pension holders drawing down lump sum benefits from funds over the same value would attract a steep 55% taxation obligation.
From 15th March 2023, that threshold and the corresponding tax have been scrapped. While this may appear beneficial and straightforward, assuming there is no requirement to protect pension wealth from LTA taxation may be incorrect.
In the interim, those with pension funds valued at £800,000 or above, who are likely to reach the £1.073 million cap before retirement, could be lulled into a false sense of security, discarding strategies commonly used, such as transferring pensions into a Recognised Overseas Pension Scheme (ROPS), included on the HMRC approved list.
Such transfers act as a crystallisation event, but even with any resulting tax charge, the benefit of a transfer is that pension funds can grow free of taxation.
For example, a pension holder transferring a fund worth £1.6 million into a qualifying ROPS before March would have attracted a 55% tax charge of £289,795, based on the value above the LTA cap. However, that ensures that the residual balance can grow tax-free without further exposure to the LTA.
However, removing the LTA, at least for now, does not mean a ROPS transfer, or an alternative option, is meaningless. In fact, the recent pension taxation reforms may mean a pension transfer is now more attractive than ever.
Exploring the Contradictions Behind LTA Reforms
Government press releases indicate that the LTA has been removed to simplify pensions, discourage doctors from entering into early retirement, and incentivise retirement savers to continue making contributions to their pension funds rather than opting to transfer wealth to alternative jurisdictions or step out of the workforce before the standard pensionable age.
In contrast, the reforms may have prompted the opposite response.
One of the many concerns all pension holders and advisers should be aware of is that it has long been suspected that several recent reforms have paved the way for pension wealth to be incorporated into the inheritance taxation net.
UK inheritance tax levies a tax bill of up to 40% on assets passed to beneficiaries, so there is a very real risk that leaving pension funds in a UK scheme will mean, in the future, your retirement savings become significantly down valued when inherited.
Inheritance tax is also far from the only consideration or potential risk associated with any lack of action in response to the removal of the LTA.
Access to Tax-Free Lump Sum Drawdowns
Pension funds remaining within the UK continue to be restricted on the amount an individual can draw down, as a lump sum, without attracting an additional tax burden. Despite the LTA now theoretically not existing, the 25% tax-free lump sum cap is still based on the previous LTA.
Therefore, a pension owner can draw up to £268,275 as a maximum value without incurring an additional 25% tax obligation.
The benefit of transferring a pension into a different jurisdiction, particularly for those expecting to access a lump sum withdrawal, is that there is no such limitation in countries where an LTA – or equivalent – does not exist.
Overseas pension funds still impose a 25% maximum lump sum drawdown, but based on the total fund value rather than any now-defunct tax-related limit. Therefore, our previous example, where our pension saver transferred a fund worth £1.6 million, would see a marked difference in their pension access.
If the fund had grown modestly over several years from £1.6 million to £2 million, the same fund in the UK would allow the owner to withdraw up to £268,275, irrespective of the fund value, before paying an additional tax liability.
In contrast, the same fund overseas would allow a tax-free lump sum withdrawal of 25% of the value, or £500,000 – almost double the tax-free value available through a British-based scheme.
Potential for the Lifetime Allowance to Be Reinstated
Another important factor is that there is a distinct possibility that the removal of the LTA will end up being a short-term, not-to-be-repeated tax efficiency exercise.
General elections planned within the next year mean that a change in government leadership is at least likely, with Labour having clearly stated that, should the party be elected to power, the new LTA legislation will be reversed immediately.
Pension owners who do not react now may find their freedom to accumulate higher retirement savings without additional tax burdens removed almost as quickly as it came.
Those who respond to the – potentially temporary – window of opportunity will be able to relax safe in the knowledge that they will not incur an LTA tax charge of up to 55%, regardless of how much their fund accumulates.
Pension Strategies Around Lifetime Allowance Changes
If we assume there is an equal chance that either major political party will win the next general election, the outcome of leaving pension products in situ without taking any action is a toss of the coin, with substantial financial repercussions for those who bet the wrong way.
Particularly individuals with larger pension funds stand to benefit from assessing their options and making informed, future-proof decisions about the best way to manage their pension assets to secure their financial future and mitigate the risks of heavy tax exposure.
Those interested in further insights and guidance are welcome to contact Chase Buchanan Wealth Management or LTA lead Malcolm McDowell and download at any time to initiate a comprehensive pension review and risk profile evaluation.
Read more about Chase Buchanan - Chase Buchanan Wealth Management Addresses the Impact of LTA Changes on High-Value Pension Saver
About Malcolm McDowell
Malcolm McDowell is an authority in pensions-related financial planning and provides comprehensive support to his clients as a portfolio manager with a robust range of accreditations, certifications and qualifications, including CySEC Advanced credentials. Malcolm has launched the new LTA advisory service and free downloadable lifetime allowance guide for pension savers who potentially benefit the most from tactical pension planning to maximise the LTA limit removal.
About Chase Buchanan Private Wealth Management
Chase Buchanan is a highly regulated wealth management company who specialises in providing global finance solutions for those with a global lifestyle. We are global financial advisers, supporting expatriates around the world from our regulated European headquarters, and local offices across Belgium, Canada, Canary Islands, Cyprus, Malta, Portugal, Spain, UK and the USA.
Chase Buchanan Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission with CIF Licence 287/15.
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Source Company - https://chasebuchanan.com/
