In part 2 of this two part article, Mark Devlin, senior technical manager, M&G Wealth Technical team, answers another 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 Fixed Protection (FP) 2014, can they now contribute to a pension and maintain that protection?
Based on the finance bill and guidance from HMRC then yes. It’s worth bearing in mind that this is based on the bill and it’s not legislation until it receives royal assent. But assuming there are no issues then contributions from 6 April 2023 will not lose fixed (or enhanced) protections, provided this was held on 15 March 2023. This could be handy if for example a client with FP 2014 has a fund value of £1,300,000, they can make contributions to take them up to the £1.5m level and effectively a further £50,000 PCLS. This is of course subject to the tax relief and annual allowance rules being followed.
2. My client is eligible to apply for Fixed Protection 2016. Can they do this now and can they make contributions once this has been granted?
They can still apply for FP 2016. There were no deadlines for application for Fixed or Individual Protections for 2016. But to get FP16 you still have to meet the condition that you have not accrued pension benefits since 5 April 2016. Assuming this is the case FP16 can still be applied for. But for those applying after 15 March 2023 making contributions would lose this.
This doesn’t mean that applying would be pointless. If a client has accrued funds of £1.1m, they can apply for FP16 and as long as it’s valid when they crystallise those benefits, they will use up 88% of their LTA (with potential PCLS of £275k). They can then contribute after the crystallisation, and they would have 12% of the standard LTA left to use for a future crystallisation which could give up to a further £32,193 PCLS. So, much better than just using the standard LTA.
3. My client has used up their LTA, still has remaining uncrystallised funds and is worried that a future change of government could reverse these changes, should they crystallise this excess now?
As stated earlier about my lack of a functioning crystal ball, this is one we will find out about in due course. However, based on where we are a client could move their excess funds into Drawdown now and face no LTA charges. It would be extremely rare for any future legislation to be retrospective, so we’ll assume that’s the case here. If the LTA were reintroduced and assuming the charges are reinstated at the current level, then they may be subject to a 25% charge on any Drawdown growth. That may be better than LTA charges on the whole amount.
We don’t know how the LTA will be abolished in legislation, so we couldn’t possibly know how this would be reintroduced (or if we get something completely different). One to keep a watching brief on and see what direction the political winds are headed close to an election?
4. Lump sum death benefits for someone under 75 will be taxed at the recipient’s marginal rate if taken as a lump sum, but if they do go into drawdown or purchase an annuity, it will be income tax free. Why would anyone take a lump sum?
Fair point. But it may be the case that the scheme only offers a lump sum to beneficiaries on death. It could also be the case that the beneficiary selected by a discretionary scheme cannot be offered beneficiaries drawdown or annuity because of legislation (this could be that they have selected a non-nominated non-dependant of the member when there is a dependant of the member alive).
Therefore, it’s vital that you know not only what the scheme can offer but that the nominations are up to date for the member and will be effective with that scheme. Something to factor into annual reviews?
5. How will things look once the LTA is abolished?
Pass, we don’t have draft legislation and see the previous comments about the lack of a functioning crystal ball!
[Main image: emily-morter-8xAA0f9yQnE-unsplash-]
