NEWS   |    June 10, 2024

Abolition of the Lifetime Allowance – How Does it Impact Employers?

The abolition of the Lifetime Allowance (“LTA”) in April came with implications that employers will want to be aware of.

When the Chancellor Jeremy Hunt announced the overhaul of the LTA in the 2023 budget, pension experts suggested it was unlikely the change could happen in the 2024/25 tax year because of the administrative challenge of removing the LTA so rapidly. The LTA is woven throughout pensions tax rules and so it is a complex process with opportunities to “drop balls” as a consequence.

These concerns, however, did not hamper an evident determination within Government to press ahead and L-Day, as it became known within the pension industry, came into effect on 6 April 2024 so that the LTA has been abolished. However, as with anything concerning tax and pensions, nothing is quite as simple as it might appear.

In place of the LTA, the Government introduced new lump sum limits which apply including a new lump sum allowance of £268,275 (being 25% of the former LTA) and a new lump sum and death benefit allowance of £1,073,100. If these limits are exceeded, the recipient will be taxed on the excess at their marginal rate of tax.

Individuals who have previously been granted LTA protections will continue to benefit from higher allowances for the lump sum and lump sum and death benefit.

In order to provide time for corrective action to take place in scheme rules, regulations with saving provisions were introduced (with retrospective effect to apply from 6 April 2024) to allow employers with defined benefit pension schemes to check the scheme rules, if they have not done so already.

HMRC has suggested that members affected by the abolition of LTA (for example, if they have specific protections or plan to transfer their savings abroad) should consider delaying retirement/transfer decisions until further regulations making minor technical changes have been passed.

Following the general abolition of the LTA, employees will also want to understand the new LTA regime, including the new lump sum maximums that apply. As is often the case in pensions, communication is key. It is essential to effectively communicate the changes to employees. Employers will also want to check that there are no statements in previous scheme communications that are now misleading, for example explanations about benefit options or what members can and can’t do.

Inevitably, pension scheme members will have questions about such a fundamental change to the way they save for retirement, so their employers must be ready with the answers.

Beth’s article was originally published in Employee Benefits, here.

The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.

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