Since the abolition of the LTA in April 2024, the M&G Wealth technical team has been receiving numerous questions regarding pension funding under the new rules. Here, Mark Devlin, Senior Technical Manager, Specialist Business Support, answers the top three questions the team has been asked.
We’re now at the point where the LTA has gone and there are quite a few queries (and issues still to be resolved) around the LSA and LSDBA. But we mustn’t forget pension funding in the new world to make use of these allowances. We are seeing quite a few queries on this subject, here are the top three that seem to be related to the LTA’s abolition.
Q1: Can clients make contributions over the age of 75?
Given the LTA abolition this has been a popular question and the simple answer is yes they can. However, individual or third party contributions will NOT qualify for tax relief, nor do they use up annual allowance. If this is for an IHT planning strategy, remember as the member is over the age of 75 any death benefits will not be LSDBA tested, but will be taxable at the beneficiaries marginal rate. Therefore, it’s crucial to analyse the position for the beneficiary (an obvious example being if the beneficiary pays higher than 40% tax would it be better to leave this money in the estate?). Added to this – the full value will suffer marginal rate tax on the beneficiary – might there be a way to get that money to the beneficiary where there is only tax on the growth.
If the contribution is an employer contribution (often used by Ltd Company Owners) then the company may get tax relief on the contribution (subject to the Wholly and Exclusively rules being met) and the contributions will use up annual allowance.
Remember contributions made purely to avoid IHT are open to challenge by HMRC and all contributions made in the two years prior to death need specifically reported to HMRC on the IHT return.
Q2: My client has enhanced/one of the fixed protections, can they now make contributions to a pension?
Yes, for clients that had applied for these protections on or before 15 March 2023 (the date of the budget that the LTA abolition was announced in) and maintained this protection until 6 April 2023 they can make pension contributions and accrue benefits in a defined benefit scheme again with no loss of protection.
Q3: My client is under the age of 75, but would like to pay more into their pension as a personal contribution than their relevant earnings.
This can come down to a few factors, the first being if the scheme operate relief at source or can accept gross contributions from the client. If the scheme operates relief at source they will as a matter of course either apply the relief immediately and claim this back from HMRC, or wait until HMRC supply the relief and add this to their pension.
However, if this occurs and the member has obtained relief on more than their relevant earnings, this must be repaid to HMRC. Whether or not the scheme will refund the excess contribution to a client will depend on the scheme rules and if they allow a Refund of Excess Contributions Lump Sum. If the scheme has this option they will repay the excess contribution to the member, if they do not this will remain in the pension scheme. Any contributions that remain in the scheme will count towards the members annual allowance, even though they did not receive tax relief.
Although if this is a strategy for IHT there may be simpler routes that could be taken, and don’t forget this is turning something that the individual had tax free access to into something that will at best (depending on available allowances) be 25% tax free for them, and if the member dies post 75, all of this will be taxable.
