The global wealth advisory firm, Chase Buchanan Wealth Management, has published a complimentary downloadable guide to provide insights and important information about the impacts of the recent removal of the UK Lifetime Allowance (LTA), a threshold previously applied to pension products, above which holders would attract additional taxation.
In the March budget, Chancellor Hunt announced a series of pension tax reforms, including the immediate removal of the LTA and higher annual pension contribution allowances, primarily to address shortages in the medical profession and to introduce pension simplicity to avoid higher earners from ceasing pension contributions to avoid triggering LTA tax charges.
Malcolm McDowell, pensions specialist and Chase Buchanan's LTA lead, advises that this apparently beneficial reform adds significant complexity to tax planning and should not be taken as an indication that those with higher pension values now need to take no further action to protect their retirement wealth.
Changes to UK Pension Tax Rules Introduced in the 2023 Spring Budget
The main changes included within the new pension tax rules are as follows:
- The LTA, the maximum cumulative value pension holders can save over their lifetime, over which taxation applies and previously set at £1.073 million, has been removed.
- Annual pension allowances, which indicate the maximum contributions an individual can make to their pension savings without an additional tax liability, have increased from £40,000 to £60,000.
- Adjusted income levels, which taper the annual pension allowances available to higher earners, have risen from £240,000 to £260,000.
Additional reforms apply to the annual money purchase allowance, or MPAA, which states the maximum value of pension savings a fund owner can deposit who has previously used pension freedoms to access their pension, again without attracting a tax charge.
Importantly, these adjustments do not affect the restrictions placed on tax-free lump sum withdrawals. While the LTA is not now in force, pension drawdowns remain capped at 25% of the previous LTA, so an individual cannot draw more than £268,275, regardless of the fund value, without an additional tax liability.
Reportedly, this cap has been retained to avoid allowing individuals to draw 25% of an unlimited fund value on retirement - although those with LTA protection features within their pension products may keep this right.
The effective tax rate applied to individuals who exceed these limits and thresholds may be complex; for example, those who exceed the annual allowance, or their adjusted allowance following tapering provisions, is based on their marginal income tax rate and applied to the excess.
How LTA Reforms Affect Pension Risk Profiles
Malcolm explains that, although the LTA removal may initially seem positive, it is essential that pension holders, advisers, and those with retirement funds of £800,000 or above consider their plans carefully, with multiple possible caveats.
He adds: “An early perspective on the announcement that no individual would incur a tax charge based on the LTA from April 2023 is positive. Expanding on pension freedoms introduced in 2015 should mean more people can contribute their hard-earned savings to tax-efficient pension schemes, with the assurance that their retirement wealth will not be subject to heavy tax liabilities.
However, multiple factors require consideration, from the likelihood that a change of government at the next general election would see the LTA reinstated to the possibility of pension wealth being netted into the scope of inheritance taxation in future reforms.
Those with higher-value pensions and with the income to benefit from the increased annual allowance may also find that tapered relief mitigates the real-world value of the higher allowance and should be mindful that, regardless of whether the LTA is reinstated, their tax-free lump sum access will continue to be limited as long as any fund is held within a scheme exposed to UK taxation.
Our newly published guide explains these elements in greater detail, laying out some of the risks of non-action and demonstrating why swift, decisive decision-making may be crucial to take full advantage of current tax treatments, which seem likely to be available for a limited window of opportunity.”
Chase Buchanan’s 2023 Guide to the Revised UK Lifetime Allowance and Pension Taxation Reforms is available to download now, free of charge, and from any location.
Anticipated Adjustments to UK Pension Tax Legislation
Currently, the LTA is excluded in pension tax computations, but changes announced in the Spring Budget have yet to be formalised into tax legislation. When the government introduces a tax reform, it can instruct HMRC to update its policies immediately, but this does not ratify the change or integrate it into official tax law.
Those changes around the LTA, annual allowances and lump sum drawdown taxation will need to be passed through a Finance Bill, not expected to be formalised or confirmed for some months to come.
Technical changes are possible when any tax reform is being applied in practice but has yet to be included as a verified update to tax legislation, and the abolishment of the LTA will not be confirmed until April 2024.
Removing the LTA is one of several measures announced as part of the Spring Budget 2023 but that were not incorporated into the Spring Finance Bill 2023, and the government has stated that it intends to publish new announcements related to tax administration later in the year, which it does not expect to require legislation.
The Value of Financial Guidance in Long-Term Pension Planning
Specialist financial assistance has always been an important aspect of pension planning, since the vast majority of people rely on their retirement savings to cover their living costs and provide for a comfortable retirement over an increasing number of years.
The LTA, since being introduced in 2006, adds a layer of complexity for pension holders who often select strategies such as transferring a pension fund to an alternative jurisdiction or investment scheme before hitting the applicable limit or to protect themselves from future tax exposure and changes to UK tax treatments as their pension fund grows.
With these recent reforms, all pension holders may benefit from advice tailored to their pension assets and overall wealth portfolio, with independent advice mandatory in many circumstances as dictated by the Financial Conduct Authority (FCA).
Read more about Chase Buchanan - Why The Removal Of The UK Pension Lifetime Allowance May Be More Complex Than Appears
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.
Media Contact:
Malcolm McDowell
Chase Buchanan Ltd
+44 (0) 1252852045
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