A big surprise in the Spring Budget was the abolition of the lifetime allowance (LTA). From 6 April, the tax charge for breaching it will be removed and the allowance itself will be scrapped from April 2024. This is “the biggest u-turn on pension tax policy in a decade”, says Jon Greer, head of retirement policy at Quilter.
Generally speaking, the abolition of the LTA is good news as it will allow you to contribute significant amounts to your pension without worrying about a tax charge. At its current level of £1,073,100, the LTA had become increasingly easy for middle earners to trigger. For example, the maximum income someone in a final-salary scheme could build up without paying a lifetime allowance charge was £53,655.
People whose pensions were above the value of the LTA and due to be tested against it in the near future stand to benefit significantly. Tom Selby, head of retirement policy at AJ Bell (AJB), says that an example might be a retiree approaching their 75th birthday who crystallised their entire £1mn pension pot in the 2016-17 tax year, took £250,000 tax-free cash and put the remaining £750,000 into drawdown. The retiree has not touched the drawdown fund since and kept it invested with a pretty aggressive strategy, resulting in 10 per cent growth a year. So by the time they are age 75 and the pension is tested against the LTA, its value has grown to around £1,461,000. Before the changes announced to the LTA, this would have resulted in a 25 per cent or £96,975 charge, with income tax to pay on top of that.