5th March 2024
The Lifetime Allowance – opportunity to make further contributions?
There has been a lot of discussion recently around the rules on Fixed Protection and the Lifetime Allowance. The Lifetime Allowance is set to be abolished from 6th April 2024, meaning that, based on current legislation, individuals will not incur a Lifetime Allowance tax charge. Prior to this rule change, individuals with Fixed Protection were not permitted to make pension contributions without invalidating their protected pension limit and therefore causing a potential tax charge for themselves. This rule has now changed, and individuals with Fixed Protection are now permitted to make new pension contributions and thereby enhance the benefits of their existing pension. In addition, individuals who do not have Fixed Protection but stopped contributing because they reached their Lifetime Allowance are also able to make further contributions without being concerned about a future Lifetime Allowance charge. This is based on current legislation and could change, but these are the rules as they stand at the time of this article being written.
To provide ease of understanding, we have provided a worked example for you below.
Peter has relevant earnings of £190,000 in the 2023/24 tax year and is nearing retirement. He holds Fixed Protection 2016, which protects his Lifetime Allowance at £1,250,000. Having refrained from pension contributions since securing fixed protection, he can now, under the new regulations, make a £60,000 pension contribution in 2023/24. Additionally, he can contribute further to utilise his unused allowance from the preceding three tax years, but his adviser would need to calculate how much allowance he can bring forward from previous tax years.
Consequently, Peter has the potential to make a total gross contribution of £60,000 and receive tax relief. By opting for a net pension contribution of £48,000 (£60,000 gross) utilising his 2023/24 annual allowance, he stands to gain £12,000 immediately in tax relief for 2023/24 and then a further £15,000 in the form of additional rate tax relief. This pension contribution would effectively cost him £33,000. This not only results in tax savings but also contributes to the growth of his pension pot.
One caveat to the above is that an individual’s total tax-free cash amount is still capped at 25% of their protected Lifetime Allowance, i.e., if an individual had £1,250,000 protected, then the total tax-free cash they could take would be £312,500 over their lifetime. If, for example, Peter had already received £312,500 in tax-free cash prior to making a new contribution, then he would not be able to take 25% tax-free from the new contribution. This would simply sit in his pension pot and could be taken when he needed it, but the amount would be fully taxable based on Peter’s marginal rate of tax. However, Peter also has an inheritance tax liability, and therefore he decided to put more money into his pension as these funds do not form part of an individual’s estate for inheritance tax purposes.
This is worth considering and provides an opportunity to put more funds away into a pension, one of the most tax-efficient products available in our current regulatory system. If this is of interest to you, then please do not hesitate to contact your Financial Adviser or call us on 01628 480200.
Disclaimer:
The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 19th February 2024.
The content of this publication is for information purposes and should not be treated as a forecast, research, or advice to buy or sell any particular investment or to adopt any investment strategy. It does not provide personal advice based on an assessment of your own circumstances. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice.
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