I’ve had a lot of conversations recently about the Budget announcement scrapping the lifetime allowance (LTA) for UK pension schemes and the increase in the annual allowance.
Rather than summarise the changes, I’m going to offer my take on their significance:
Inheritance tax: Some advisers see this as an opportunity to use UK pension schemes for the purpose of inheritance tax planning. The idea is that you fill your pension scheme to the brim, do not access the funds and pass those to the children, thereby benefiting from the inheritance exemption that applies to UK registered pension schemes. My personal view is that this is not a good idea. Death may be a long way off and future governments will undoubtedly adjust the rules further if individuals start to use pension plans in this way. There is history here: UK tax rules have adapted to prevent individuals in poor health from loading up their pension scheme (or not accessing it) and using the IHT exemption. Labour has also announced its intention to reintroduce the LTA.
Saving LTA charges: For those who have pension savings exceeding the current lifetime allowance of £1.073m, the scrapping of the LTA will save them paying an LTA penalty charge. The way the LTA works is that it requires the savings above the LTA to pay an additional charge on top of the income tax that would normally be paid on pension income. Anyone 55 or older with savings above the LTA should consider crystallising their pension from 6 April 2023 given that Labour has pledged to reintroduce the LTA.
Contributions: Should individuals contribute to UK pension schemes more heavily now that the annual allowance is increasing? Depending on your level of income, the new annual allowance will be between £60,000 and £10,000 p.a. This allows for more income tax relief, and individuals with modest pension savings will benefit. For anyone under 55 who is close to or exceeds the current LTA of £1.073m, they should be cautious about stuffing the pension plan with contributions if the reintroduction of the LTA is a possibility in the next two or three years.
Double tax treaties do not protect individuals from the lifetime allowance charge. This is because it is a penalty charge and not income tax. Therefore, clients living overseas and hoping to use tax treaties to protect themselves from UK income tax will benefit from the scrapping of the LTA. They should consider crystallising their pension plan from 6 April 2023 if they are 55 or older.
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Allowances for UK pensions schemes
Four tax considerations.
I’ve had a lot of conversations recently about the Budget announcement scrapping the lifetime allowance (LTA) for UK pension schemes and the increase in the annual allowance.
Rather than summarise the changes, I’m going to offer my take on their significance:
Inheritance tax: Some advisers see this as an opportunity to use UK pension schemes for the purpose of inheritance tax planning. The idea is that you fill your pension scheme to the brim, do not access the funds and pass those to the children, thereby benefiting from the inheritance exemption that applies to UK registered pension schemes. My personal view is that this is not a good idea. Death may be a long way off and future governments will undoubtedly adjust the rules further if individuals start to use pension plans in this way. There is history here: UK tax rules have adapted to prevent individuals in poor health from loading up their pension scheme (or not accessing it) and using the IHT exemption. Labour has also announced its intention to reintroduce the LTA.
Saving LTA charges: For those who have pension savings exceeding the current lifetime allowance of £1.073m, the scrapping of the LTA will save them paying an LTA penalty charge. The way the LTA works is that it requires the savings above the LTA to pay an additional charge on top of the income tax that would normally be paid on pension income. Anyone 55 or older with savings above the LTA should consider crystallising their pension from 6 April 2023 given that Labour has pledged to reintroduce the LTA.
Contributions: Should individuals contribute to UK pension schemes more heavily now that the annual allowance is increasing? Depending on your level of income, the new annual allowance will be between £60,000 and £10,000 p.a. This allows for more income tax relief, and individuals with modest pension savings will benefit. For anyone under 55 who is close to or exceeds the current LTA of £1.073m, they should be cautious about stuffing the pension plan with contributions if the reintroduction of the LTA is a possibility in the next two or three years.
Double tax treaties do not protect individuals from the lifetime allowance charge. This is because it is a penalty charge and not income tax. Therefore, clients living overseas and hoping to use tax treaties to protect themselves from UK income tax will benefit from the scrapping of the LTA. They should consider crystallising their pension plan from 6 April 2023 if they are 55 or older.
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