Budget 2023: Pension Lifetime Allowance

In his 2023 Spring Budget the Chancellor announced the effective abolition of the Pension Lifetime Allowance with effect from 6 April 2023. This means there will no longer be a tax charge if the value of your pension fund exceeds £1,073,100 (or higher figure if you have one of the protections in place) at the time of a ‘benefits crystallisation event’.

A benefits crystallisation event occurs when you start to take benefits, turn 75, or die.

This move will be welcomed by those who have pension funds of more than £1,073,100 or were likely to have by the time of a benefits crystallisation event and could result in significant tax savings for this group.

The Chancellor hopes that this move will stop people retiring because of potential pension tax charges and encourage those who have already retire to return to the workforce.

We were already seeing clients using pensions as an estate planning vehicle, as they are generally exempt from inheritance tax, and this move will make them even more attractive, assuming this inheritance tax-free status is maintained.

We will need to wait for the detail to see whether the historic protections become redundant, and those who made them will be able to make further pension contributions without prejudicing their tax positions.

Alongside the abolition of the Pension Lifetime Allowance, the Chancellor has announced a restriction to the tax-free lump sum. This is capped at 25% of the current lifetime allowance, meaning up to £268,275 can be taken tax-free. This limit will be higher if you have an existing pension protection in place.

It will be interesting to see whether this signals a significant policy change, and the tax-free lump sum is restricted further in the future.

If the Budget has raised any questions for you, book your place on our Budget question time webinar this Friday, 17 March at 9:30am. Alternatively, if you would like further information, please get in touch with our team.