What the new UK pension regime from April 2024 could mean for you

31/01/2024
By David Snelling

As you may be aware, in his 2023 Budget statement, the UK chancellor, Jeremy Hunt, revealed that the government were going to scrap the pension Lifetime Allowance (LTA).

Soon after that statement, a new Finance Bill was passed effectively doing away with the charge and fixing the maximum tax-free amount you can take from your pension to up to £268,275.

Following that, new legislation has now been published that fleshes out some of the changes made and makes other changes that could affect how much you save in your pension fund, and how you draw income when you retire.

Read on to discover the key changes, and how you may be affected.

There are two new allowances that could affect your pension planning

While the LTA previously limited the amount you could accrue tax-efficiently in your retirement fund, from April 2024 the only limits will be on lump sums you take from your fund.

To enable this, the government have confirmed two new allowances:

The Lump Sum Allowance

The Lump Sum Allowance (LSA) will effectively be the amount of tax-free cash you can take from your pension fund.

As previously, you will be able to take 25% of your fund tax free, but this will be limited to a maximum of £268,275 – 25% of the previous LTA threshold.

In simple terms, the LSA will cap tax-free cash from pensions paid during your lifetime.

The Lump Sum and Death Benefit Allowance

This will be the limit of your own tax-free lump sums and any additional tax-free element paid to your beneficiaries on your death. Your Lump Sum and Death Benefit Allowance (LSDBA) will be £1,073,100 – the previous LTA threshold.

Effectively, the LSDBA will limit the tax-free amount paid to your beneficiaries after your death.

Additionally, if you pass on before reaching 75, the lump sum paid to your beneficiaries will only be exempt from tax if it doesn’t exceed your LSDBA.

You should note that this new allowances may not apply if you have any form of protection in place.

The abolition of the Lifetime Allowance means no limit to your pension accrual

The key takeaway from the 2023 Budget, was the removal of the LTA, that previously restricted how much you could tax-efficiently save into your pension fund.

The new legislation enshrines the abolition into law, and means your fund will no longer be subject to a tax charge if it exceeds a certain amount.

If you’re saving into a pension fund, and were concerned about exceeding the LTA, this is a highly valuable change.

Whereas under the old regime, exceeding the LTA would have resulted in a 55% charge on funds drawn as a lump sum, or 25% on funds drawn as income, – on top of your marginal rate of Income Tax – now, no such charge will be made.

However, it’s important to note that, with the exception of your LSA, any money you draw from your fund will be taxed as income.

The increase to the Annual Allowance makes it easier to boost your pension fund

With the abolition of the LTA, the only limit on how much you can accrue in your pension fund tax while enjoying tax relief at your marginal rate, is the Annual Allowance.

You can now tax-efficiently contribute up to £60,000 gross – up from £40,000 – or 100% of your earnings, whichever is the lower figure.

It’s important to note, however, that your Annual Allowance may be lower if you have already flexibly accessed income from your pension fund, or if your level of earnings means that your Annual Allowance has been tapered down to a maximum of £10,000.

Don’t forget, that you can also give your retirement fund a boost by making use of the “carry forward” facility where eligible. This enables you make use of any unused allowance from the three previous tax years, as well as maximising your contributions in the current tax year.

So, theoretically, and subject to your earnings, you could pay a single lump sum of £180,000 into your fund in this current tax year.

You may have previously stopped contributing to your pension through fear of exceeding the LTA. If so, the increase in the Annual Allowance, and the ability to carry forward each give you the opportunity to boost your retirement fund if you have the means available.

If you have already drawn from your fund, you may be affected by transitional arrangements

One issue that some of our clients have had concerns about since the 2023 Budget, was how the new pension rules would interact with those in force before April 2023, particularly in relation to having taken benefits from a fund and – as a result – used up a percentage of the LTA under the old system.

In these circumstances, transitional arrangements will apply in respect of pre-2024 benefits.

This will result in your LSA and LSDBA under the new system being reduced, based on the amount of LTA you previously used.

This reduction calculation will take place the first time you draw from your fund on or after 6 April 2024. It could potentially be a complicated calculation, so we would suggest you seek professional advice.

You could be affected by a new overseas transfer allowance

As well as the LSA and LSDBA, there is another new acronym you may need to be aware of.

This is particularly the case if you are planning to retire abroad and transfer your accrued UK pension to your new country of residence.

Under the terms of the new legislation, such transfers will be subject to the 25% overseas transfer charge if they exceed your overseas transfer allowance (OTA), which is the same as the previous LTA limit of £1.073,100.

As with all the changes outlined here, if you have any questions or concerns about how this could affect you, we would strongly recommend you take professional advice.

Get in touch

If you would like to talk to us about your financial planning arrangements, please get in touch.

You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

Sign up to our newsletter

    Contact us

      privacy By ticking this box, you agree to be contacted by Charlton House WM Limited and you confirm you have read and agree to our Privacy Policy