In part 1 of a two part article, Mark Devlin, senior technical manager, M&G Wealth Technical team, answers 5 of the top 10 questions the team has received post the announcement regarding the Lifetime Allowance (LTA) changes in the Spring Budget 2023.
1. My client has used X% of the LTA and has a fund valued at £Y, how much Pension Commencement Lump Sum (PCLS) can they take in 2023/24?
The key thing to bear in mind here is that the LTA still exists for 2023/24. Providers still have to collate LTA information (for knowing how much PCLS/tax free cash can be paid out etc.). When it comes to working out how much PCLS can be paid it’s the lower of;
25% of the fund value
Or
25% of the remaining LTA.
Based on the above the maximum for the maximum PCLS your client can have is the lower of;
Y x 25%
Or
(100% – X%) x 25%
2. My client used X% of the LTA taking their DB pension/Pension with a Guaranteed Annuity Rate but took no PCLS. Can they now take up to £268,275 as PCLS.
As per the answer above, they have used some of their LTA and even though they didn’t take any PCLS the rules governing the LTA are still in place and they will be limited to a maximum of (100% – X%) x 25% as the maximum PCLS they can get.
3. My client has used 100% of their LTA and have taken the maximum PCLS that they could. When the LTA is abolished will they be able to get £268,275 tax free?
A known unknown here, as we are expecting the legislation for the LTA abolition to come in a future fiscal event. Whilst I don’t have a functioning crystal ball, it would seem unlikely for those that have used all of their LTA to be given a second bite of the tax-free cash cherry.
4. Given the Inheritance Tax Status of Discretionary Pension schemes, should my client (who is under 75) pay £500k that’s creating an IHT issue to make use of these changes?
Although LTA changes are happening the rules on Tax Relief and Annual Allowance (AA) remain with us.
Under the tax relief rules if this is a personal contribution the member would need to have £500,000 of relevant earnings, unless you can find a provider that would accept contributions that are not eligible for tax relief so that this figure can be paid.
The budget did increase the standard AA to £60,000. Even assuming maximum carry forward for the previous three tax years the maximum that can be paid in without an AA excess would be £180,000.
5. My client is over 75 and has his own limited company, can he make a substantial employer contribution and benefit from the IHT friendly nature of a discretionary pension scheme to move money from my clients IHT-able estate?
Whilst personal (or third party) contributions for over 75’s won’t use AA (as they are not eligible for tax relief), employer contributions for over 75’s still use AA. So as per the above answer the maximum that can be paid in without facing an AA charge would be £180k. The employer may gain corporation tax relief if this contribution is wholly and exclusively for the purposes of trade. However, if IHT planning is on the agenda then this may not be wholly and exclusively for the purposes of trade.
Further to this whilst employer contributions are usually exempt HMRC may look into substantial and unusual contributions which could affect the IHT effectiveness of this strategy too.
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