Background and history

The legislation

The Finance (No.2) Act 2023 removed the L T A charge for the tax year 2023/24.

The Finance Act 2024 abolishes the L T A in full.

The lump sum rules remain in the Finance Act 2004; however, the tax provisions are now contained within the Income Tax (Earnings and Pensions) Act 2003. New chapter 15A contains sub sections 637A to 637S – these define the new lump sum
allowances and how any excess is taxed.

The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 take effect from 6 April 2024. They amend the Finance Act 2024 in multiple areas where it did not deliver policy intent.

Changes in brief

This section provides a short summary of the main changes. As with the LTA, most members will not be impacted by the new lump sum limits.

From 6 April 2024:

• the lifetime allowance (LTA) is fully abolished
• there is no longer a specific limit on the pension savings an individual can build up in their lifetime
• two new lump sum allowances are introduced: lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA)
• these lump allowances continue to restrict the payment of tax-free cash
• lump sums paid in excess of the LSA and LSDBA are taxed at the individual’s marginal rate (instead of at 55 per cent which applied under the LTA regime)
• all annual pension is taxed at the individual’s marginal rate
• LTA protections increase the standard LSA and LSDBA
• pension commencement excess lump sums (PCELS) replace lifetime allowance excess lump sums (LTAELS)
• a new overseas transfer allowance (OTA) for transfers to a qualifying recognised overseas pension scheme (QROPS) is introduced
• relevant benefit crystallisation events (RBCE) replace benefit crystallisation events (BCE)
• transitional arrangements take account of benefits paid before 6 April 2024 – they broadly assume the member has taken 25 per cent of their used LTA as a lump sum
• members can apply for a transitional tax-free amount certificate (TTFAC) if they have taken less than 25 per cent of their used LTA as tax-free lump sum
• RBCE statements replace BCE statements – you report the LSA and LSDBA used a monetary value
• RBCE statements continue beyond age 75
• there are changes to paying tax charges and reporting requirements
• there is a new reporting event 24.

Background to tax changes

Before 6 April 2006

Various tax regimes applied to pension schemes depending on the type of scheme. These regimes included an earnings cap restricting the amount of salary on which pension contributions could be deducted, limits to the amount of pension contributions that could be paid (generally 15 per cent of pensionable pay) and limits on the amount of membership that could be built up.

6 April 2006 to 5 April 2023

A new pensions tax regime was introduced from 6 April 2006 – A-day. The lifetime allowance (LTA) was introduced as part of these reforms.

The LTA was the total amount an individual could build up in pension savings without having to pay a tax charge. Initially the LTA was £1.5 million. It reached a peak of £1.8 million in the 2011/12 tax year. It was then reduced in 2012, 2014 and 2016,
when it reached its lowest level of £1,000,000. From 2018 it increased in line with inflation before being frozen at £1,073,100 from the 2020/21 tax year.

The test against a member’s LTA was carried out when a Benefit Crystallisation Event (BCE) occurred. In the LGPS, BCEs generally took place when a member took payment of their benefits or transferred to a Qualifying Overseas Recognised Pension Scheme (QROPS). A BCE also occurred where an authorised death benefit lump sum was paid or a member reached age 75 and had not taken their benefits.

A list of BCEs and their relevance in the LGPS, before and after 5 April 2024, is
included in the Glossary.

If an individual’s pension savings exceeded the LTA, a tax charge was payable. The
tax charge was 25 per cent on excess pensions and 55 per cent on excess lump
sums.

Each time the LTA was reduced, members were able to apply to HMRC for an LTA
protection.
From 6 April 2024, LTA protections can be used to protect an increased amount of
tax-free lump sum by increasing the values of the member’s available LSA and
LSDBA.

6 April 2023 to 5 April 2024

LTA charges were removed for any BCEs taking place in the 2023/24 tax year. Marginal rate income tax applied to all pension and lump sum payments that formerly attracted LTA charges. Although you were required to continue to operate LTA checks there was no requirement to report LTA charges on the AFT return.