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Understanding LTA – What Lifetime Allowance Changes Means for Your Retirement

2023 Changes to LTA – Lifetime Allowance Updates for Your Retirement Plans

When the Chancellor scrapped the LTA (2023 Lifetime Allowance changes) on UK pension funds, effective from April 2023 onward, many pension savers, international expats and those approaching retirement welcomed the news, with the knowledge that pension assets worth over the previous threshold would not now be exposed to heavy tax obligations.

However, the impacts are complex and many, where pension tax reforms have immediately altered the risk, opportunities and decision-making associated with thousands of retirement portfolios.

The most notable impact will be on those with pension funds valued at £800,000 or above and expats who may now need to completely reassess how they intend to transfer, retain or reinvest funds as a tax planning measure.

How the Removal of the LTA Affects Expat Pension Transfers

Expats typically opt for one of several ways to manage their pension wealth, depending on their objectives, wider investment strategy, tax position, and status as tax residents in both their home country and new place of residence overseas.

In summary, the options include the following:

    • Transferring British pension funds to an overseas scheme included on the HMRC Recognised Overseas Pension Scheme approved list.
    • Keeping pension funds as they are and receiving benefits or transferring funds into an overseas bank account.
    • Transferring their pension assets to a private scheme, such as a Self-Invested Personal Pension.
    • Extracting pension finances and reinvesting into an alternative product or structure.
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Each possible solution carries risks and rewards based on overseas transfer charges, income and inheritance tax, access to pension freedoms, maximum lump sum withdrawals, and the flexibility to choose investment assets, classes and sectors.

The Lifetime Allowance changes, removing the LTA, adds another layer to this decision-making, where it may now be advantageous to transfer funds, accepting any applicable transactional and tax liabilities in return for a – potentially temporary – release from the previous obligation to pay up to 55% tax on funds valued above £1.073 million.

As always, the most suitable options require a full review of your retirement plans, pension products and the pros and cons to ensure you make sound financial decisions.

Restrictions on Pension Drawdowns

Another consideration is that, although the Lifetime Allowance changes and removal of the LTA came into force immediately, it is not without caveats.

With a UK general election expected next year, the Labour Party has already confirmed it would reverse the reforms and restore the LTA, effectively reversing the new Lifetime Allowance changes meaning time is of the essence for those who stand to benefit by taking swift action in the interim.

Individuals and families planning for retirement also need to be mindful that the previous LTA threshold is still being used as the baseline calculation level for tax-free lump sum drawdowns, an option that allows retirees to access up to 25% of their pension wealth and receive the balance periodically or in regular payments.

All UK schemes remain subject to a maximum 25% tax-free lump sum, based on the now defunct LTA, meaning the upper limit retirees can withdraw without attracting a tax levy is fixed at £268,275.

Pension funds transferred to an alternative scheme or structure may still be subject to a maximum 25% withdrawal. However, they will not necessarily have any upper cap implemented on the cash value extracted and instead base the 25% limit on the total value of the fund at the drawdown date.

Future-Proof Retirement Planning

As yet, we cannot predict whether the LTA will be reintroduced a few short months after being withdrawn or whether any further changes are likely, given that the reforms have not yet been formalised into legislation and are pending a Finance Bill anticipated in 2024.

In the meantime, it is clear that there are varied elements of these recent tax reforms that will affect many people, including expats living around the world whose retirement plans and tax planning forecasts may now have changed significantly.

Independent, tailored advice is necessary, especially where the window of opportunity to leverage the absence of an LTA cap opens up new potential solutions or strategies, allowing expats and those planning for retirement to reduce their long-term tax liabilities while protecting their wealth.

Risk is always a fundamental factor of retirement planning, and whilst any changes to taxes that appear to reduce obligations may seem positive, the uncertainty around the future of the LTA has created a new, less stable risk profile for many pension plans.

If you would like more information about how the Lifetime Allowance changes and removal of the LTA is likely to affect your pension funds or wish to evaluate and revisit the efficacy of your current plans, please contact Chase Buchanan at your convenience.

New and existing clients can also request a consultation with Malcolm McDowell, LTA Specialist and Private Wealth Manager, our lead adviser on all things LTA related.

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Lifetime Allowance Changes (LTA) advice.

 

If you’re thinking about how the 2023 Lifetime Allowance changes may affect your retirement plan, then an initial conversation with Malcolm McDowell is a positive place to start.

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