UK Lifetime Allowance Taxes – How to Protect Your Pension

Holding a high value pension fund may seem ideal, but some expat retirees face complications if they transfer or reinvest those funds via a transaction that attracts a tax charge.

Although the Lifetime Allowance was abolished in April 2024, and the government has stated it will not reintroduce it, there remain tax exposures to be aware of.

Tax deductions against large lump sum pension withdrawals, for example, could dramatically impact your retirement budget, as could transferring a UK-based pension fund worth over £1 million overseas.

Expats have several available options to safeguard their life savings and minimise exposure. We’ll run through some of those potential strategies here.

Chase Buchanan works with expats worldwide, providing comprehensive financial advice and wealth management support to protect your financial future. If you are concerned about triggering a heavy tax charge or wish to proactively protect your retirement income ahead of an international move, please get in touch.

Explaining Changes to the UK Lifetime Allowance

The Lifetime Allowance (LTA), which no longer exists in its previous form, was fixed at £1,073,100. The basics were that the LTA acted as a ceiling on the amount you could save in pension benefits without becoming liable for further taxation on top of any tax deducted at source from the original contributions.

Although most people approaching retirement with a generous pension fund would undoubtedly have welcomed the news that the LTA was being scrapped, astute planning remains key for several reasons:

• The LTA is not, as it stands, set to be reinstated. However, that does not necessarily guarantee it will never be reenacted in one form or another.
• New tax levies were created to replace the LTA, determining the events in which accessing a large pension fund and moving or transferring the benefits could still give rise to a liability.
• Those new allowances are connected to the original LTA cap, meaning the £1.073 million threshold remains very much relevant.

Assessing your retirement plans now, evaluating whether the value of your pension will attract a significant tax charge, and creating a strategy to protect your wealth is the best way to ensure you know whether your pension wealth will tip over the threshold and the compliant, legal steps you can take to improve your position.

New Allowances That Supersede the Lifetime Allowance

There are three primary allowances introduced following the closure of the old LTA scheme:

• The Lump Sum Allowance (LSA) enables the tax office to raise a tax charge on any lump sum withdrawals made from a pension fund worth more than 25% of the LTA threshold – or £268,275. Lump sums drawn below this value are typically tax-free.
• The Lump Sum and Death Benefit Allowance (LSDBA) is equivalent to the LTA and limits the amount of tax-free death benefits or lump sum payments that can be received or paid without a separate tax levy.
• The Overseas Transfer Allowance (OTA), also set at the same rate as the LTA, restricts the value of pension assets you can transfer to an approved Recognised Overseas Pension Scheme (ROPS), again, before a tax liability becomes payable.

All this means that, on the face of it, you can save as much as you like into a pension fund without any specific concerns that the value of your scheme will trigger a tax obligation.

However, when you begin to draw on your retirement wealth and access your pension, you may swiftly find that a higher-value pension gives rise to considerable tax burdens.

One issue with these allowances is their broad scope, including all pension benefits across all products. Simply splitting your retirement assets across different accounts won’t always protect your funds.

Excluding the UK State Pension, defined contribution pension schemes, private and occupational pension products, and defined benefit plans could all be subject to taxation if they reach the £1.073 million threshold or provide a lump sum over 25% of that cap.

Pensions are designed to appreciate, and with accumulated contributions, interest, investment returns and tax relief, it is easier than you might imagine to reach the tax-free limit. For example, if you have a defined benefit scheme based on your final salary from an employer, a pension worth £52,750 a year (or £4,396 a month) will be worth as much as £1,055,000.

Expat Protections from Pension Allowances and Taxation

Living overseas, unfortunately, doesn’t universally defend your retirement savings from UK tax charges.

While Britain’s double tax agreements with most developed countries mean many international expats are not liable for British taxes on their UK pension income and pay the local rates, that is not the case when accessing, withdrawing from or transferring a pension currently based in the UK.

However, minimal income tax deductions or beneficial foreign-source pension tax rates can be a great incentive to help with your decision-making if you’re planning a relocation and would like to maximise the value of your pension.

The key is to speak with an experienced, regulated, and knowledgeable wealth manager who has a thorough understanding of the tax legislation both in the UK and in your preferred overseas jurisdiction, who can assess your tax status and provide custom guidance about the best way forward.

Overseas Pension Transfers

One option for expats is to opt for a pension transfer to a Recognised Overseas Pension Scheme (ROPS). ROPS funds must be approved by HMRC and can provide a raft of substantial benefits, including:

• Limited exposure to UK taxes.
• Lower pension tax rates.
• Flexibility over the currencies you save in.
• Advantages with estate planning and inheritance tax liabilities.

After a transfer, pension funds in a ROPS account, are not exposed to UK taxes, regardless of how much you save or by how much the fund value appreciates. This makes it a good option if your pension assets are not yet at  the threshold, but are likely to reach it.

However, a caveat is that the 25% Overseas Transfer Charge (OTC) may apply, particularly after the exclusions that previously exempted some pension transfers to schemes in the European Economic Area (EEA) were removed at the 2024 Autumn Budget, with effect from 30^th October 2024.

Alternative Pension Fund Investments

A further alternative is to look at tax-efficient investments outside of pension products. For example, you might withdraw your UK pension benefits and reinvest overseas in your host country. Multiple investment routes may deliver higher returns, greater flexibility, and protection from pension taxes.

You can also consider a Self-Invested Personal Pension (SIPP) scheme, which avoids the Overseas Transfer Charge, and allows you to have more control over how you invest your pension.

However, there are tax implications with inheritance planning. The best option for your retirement fund will depend on many factors, including:

• The current and projected future value of your pension funds.
• Where you live and your plans to relocate abroad.
• Your retirement expectations, budgets and lifestyle aspirations.
• Estate planning and exposure to potential inheritance taxes.

It is essential to seek tailored advice before making any decisions about your pension funds, given the importance of these assets to support you and your family throughout your retirement.

Please contact Chase Buchanan’s nearest team for further information about any of the potential solutions explored here, or to craft the most beneficial strategy to protect your pension from unnecessarily high tax exposure, both now and in the future.

*Updated October 2024