LTA Tax charge scrapped 2023/24 with LTA removed 2024/25 - planning considerations?
Wildparaplanner
Member
Hi everyone,
Key Points from budget for considerations:
1. AA up from £40,000 to £60,000
2. MPAA up from £4,000 to £10,000
3. TAA up from £4,000 to £10,000 with the adjusted threshold increased from £240,000 to £260,000
4. LTA charge gone from April 2023
5. LTA abolished from April 2024
6. Maximum PCLS (ignoring protections) of £268,275
7. Members with a valid protection certificate (enhanced or fixed) prior to 15 March 2023 will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection. In essence, their access to higher PCLS is maintained.
I was wondering what your planning thoughts/considerations have been for the proposed budget changes (subject to it being legislated)?
I had some thoughts on potential scenarios, but wonder what other people have come across / considered?
1) Client's already utilised 100% of LTA and taking taxable income from FAD - My thought is that a client in this scenario should absolutely switch from taking taxable income from FAD and start taking taxable income from the uncrystallised element (how pension providers will structure this, is yet to be seen). The reason for this is that politically, a U-turn could happen or a new government could come in and re-enforce the LTA. In this regard, if the LTA ever came back, then you would just switch back to FAD and the LTA would then affect a lower uncrystallised pot (if there was any left).
2) Client's had LTA protection and is still in work - We have had clients where they have actively opted out of auto-enrollment to protect their protection. These clients should absolutely opt back in to the pension scheme and (where possible) take advantage of new contribution limits and carry forward.
3) Clients in a DB scheme looking to access benefits with commutable PCLS, but also have a substantial DC scheme- Assuming no protections, if the client were to take the full pension from the DB scheme and not commute any PCLS, would they still have full access to the (up to) £268,275 PCLS from the DC scheme? Or would the notional LTA certificate which would still be issued in 2023/24 result in reduced PCLS from the DC scheme based on what LTA is used? How would this apply in 2024 when the LTA will go completely? Would a client be better off not commuting PCLS from the DB scheme to preserve PCLS in the DC scheme?
Interesting to hear your thoughts
Thanks
Wild
Comments
I think you should wait until the finance bill gets royal assent as the rules are up in the air and we've ntto got the faintest idea how the LTA will be abolished.
Keep thinking about scenarios but wait until the picture is clearer (in my view)
Need to see the law and the subsequent law!
I'm with Les on this. I think there are some really interesting risks to be considering and the devil will be in the detail. We are holding fire on getting too excited. A few of our thoughts are:
The shot across the bow from Labour has made us take a cautious approach. Other planning things I think are going back to what are you using the vehicle for? Is it for pension income types of reasons (in which case the PCLS situation is relevant) or is it to shelter/pass on wealth? Are you using other tax wrappers and diversifying them to manage risk.
Very interesting times to be in pensions.
Chartered Financial Planner
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Head of Technical at Paradigm Norton
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Hi, I’m starting to think about the changes to wording we need to make for the new tax year. How are others dealing with the lifetime allowance changes and wording in their letters?
My understanding is the same as @Wildparaplanner in that the LTA still exists in 2023/24, but excess is charged at 0%. It is abolished in 2024/25. Therefore I think we still need to comment where clients are crystallising until 5th April 2024, even if the charge is gone?
If some has died within the last few months and has an LTA issue can their beneficiaries delay making a decision on the death benefits until after 6th April to avoid the LTA charge?
Apparently so, according to something I read but I can't recall where, sorry!
Thanks Tom.
I was sure I had seen it in an article, or possible on here, in the last week or so but I can't find it again!
Death benefits get tested when they are paid/designated not when you die. There are serious holes in the finance bill that need addressed though especially after this yesterday - https://www.gov.uk/government/publications/lifetime-allowance-guidance-newsletter-march-2023/lifetime-allowance-guidance-newsletter-march-2023
I thought death benefits are all effectively treated as occurring immediately prior to death? The test doesn't happen until they are paid, but the the test is done as at date of death. This avoids timing death benefits from different schemes to manipulate the tax and ensures that all beneficiaries have equal liability to a charge.
I'm not sure if that means someone who died yesterday can avoid an LTA tax charge by waiting until next tax year? I think it will be a while before the wrinkles are straightened out.
Yes they can.
The treated as happening at date of death is just there to ensure the equitable treatment where there are multi schemes/beneficiaries. The test is done when paid / designated.
Importantly we may have moved away from the charge being split equitably...
This is the start of things and by no means the end yet!