It’s difficult to believe now that in 2006 we had Pensions Simplification, but we did.  One of the things that was introduced to simplify the system was the Lifetime Allowance, an overall limit of tax advantaged pension funds that could be built up in whatever type of pension you might have.  The idea was to move away from different systems for Defined Benefit and Defined Contribution and have one system, with an equal cap on tax advantages and additional tax charges for exceeding those limits.

Since then we have had changes to the system on a regular basis and the end result has become more complex than the old system ever was.  The latest change to the Lifetime Allowance (“LTA”) is that it is going; well it is, but not quite yet; and when it is gone, it will still sort of be there in the background.

First the timeline then:

• Up to 5^th April 2023 the current LTA system continues to exist;
• From 6^th April 2023 to 5^th April 2024 (proposed) the LTA will still exist but no LTA tax charge will apply to anyone drawing benefits;
• From 6^th April 2023 the maximum Pension Commencement Lump Sum (“PCLS”) will be 25% of your pension fund capped overall at £268,275 unless you have a Protected higher amount;
• From 6^th April 2024 (proposed) the LTA will be entirely abolished;

The fact that the LTA will still exist after 5^th April 2023 means that there are a few instances around lump sum death benefits primarily where a tax charge will apply however, these are pretty niche.

Working through the implications of what is happening, here are some of the key things that need thinking about:

1. If you are in the unusual position of having applied to draw pension benefits which are in excess of the LTA then if you can defer drawing them until after 5^th April 2023 you will avoid the additional tax charge.

In this situation speak to your pension administrator as soon as possible

1. When the LTA has fallen in the past, people had the chance to apply for a Protection of the previous higher allowance.  However, with some of those came the requirement that no more money was paid into a pension (Enhanced Protection and Fixed Protection). Paying money into a pension would invalidate that Protection and the higher allowance would be lost.

This still applies before 6^th April 2023 so you should not pay anything into a pension before then if you have one of these Protections.

1. The Protections mentioned allowed for 25% of the Protected LTA as a maximum PCLS, normally referred to as tax free cash.  This continues to apply and after 5^th April 2023 you can pay more into a pension without losing that Protection.

If you have reached your Protected LTA, any further contributions will only provided for taxable income.  The question then is what tax relief will you get going in, what tax will you likely pay coming out and how much is the margin.

1. Anyone who had stopped paying into a pension because they were at or near the LTA can now pay further contributions into a pension without expecting to pay an additional tax charge when drawing the pension.  However, because the PCLS is capped at £268,275, those contributions will only be able to provide taxable income, as noted above.

If, because of the LTA, you had not taken up or had left membership of a pension where your employer would pay into it, regardless of not getting any additional PCLS, the margin gained because of the employer contribution will mean membership once again becomes beneficial.  However, if you have been paid additional salary instead then the maths still needs to be done to see what is best for you. 

1. If you had opted out of a Defined Benefit pension scheme because you had reached the Lifetime Allowance or had applied for one of the Enhanced or Fixed Protections, after 5^tH April 2023 you may be able to rejoin the scheme and build up further benefits without the additional tax charge.

Every scheme is different and rules on rejoining vary, as do the rules on whether any new service is separate from your old service or gets joined up.  Whether to rejoin is not a simple question I’m afraid

1. The Annual Allowance continues to apply to contributions in to a pension or membership of a Defined Benefit pension scheme, as do the Taper provisions, albeit with a higher Annual Allowance of £60,000 and a return to the minimum level of £10,000pa

If you are a high earner you still need to consider the Annual Allowance and any tax charge that might apply because of that when considering whether to rejoin or pay more into a pension scheme.