The Removal of the UK Pension Lifetime Allowance: What Does It Mean for Expats?

In the Spring Budget of 2023, the UK Chancellor of the Exchequer, Jeremy Hunt, announced that the pension Lifetime Allowance would be scrapped.

This decision was totally unexpected and has significant implications both for pension savers in the UK and those of us who live overseas and retain UK pensions.

Recap: What is the LTA?

The LTA is a limit on the amount of UK pension savings that you can build up over your lifetime without incurring additional tax charges.

Pre-budget, the LTA stood at £1,073,100. It had previously been as high as £1,800,000 and as low as £1,000,000.

Any pension that you had above this limit would have been subject to these additional tax charges when you came to draw them.

What does the removal of the LTA mean for expats?

The removal of the LTA means that there will now be no limit on the size of the UK pension pot that you can accumulate.

This means that you will have greater flexibility and control over how you access your pension savings.

In addition, the LTA is a complex and bureaucratic system that is difficult for many people to understand. Its removal will simplify the pension system and make it more accessible to all.

However, while it may offer greater flexibility and control over pension savings, there are concerns that it could exacerbate existing pension inequalities, reduce tax revenue for the government, and have wider implications for the economy. 

It remains to be seen how the removal of the LTA will play out in practice, and whether it will ultimately be seen as a positive or negative move for UK pension savers.

What about tax-free cash?

When you retire, you can take out up to 25% of your pension as lump sum free of UK tax (as an expat you should always check the treatment of this lump sum with a tax adviser in your current country of residence).

The Government has kept the limit on this lump sum at its current level of £268,275. 

If you have taken out one of the various LTA protections offered when the LTA was reduced in the past, you may be able to take out more tax-free cash. 

For example, if you had a protected LTA of £1.5 million, you would still be able to take out 25% of that figure tax-free, which is £375,000.

If you took out this protection before 15 March 2023, you could restart your pension contributions after April 6 without losing your entitlement to a higher level of tax-free cash.

Will Labour reinstate the lifetime allowance?

That is certainly possible.

With the shadow chancellor immediately threatening  to reverse the abolition and even Sir Keir Starmer promising to give-up his pension privileges in order to enable the reversal, we were served a reminder that pensions are extremely political!

The next general election must be held by January 2025, meaning the Lifetime Allowance could be reinstated after just 9 months of the 2024/25 tax year by a new Labour administration and could be backdated to April 2024.

How do I protect myself against the lifetime allowance being reinstated?

If the LTA is reinstated, it may be possible to protect what has already been built up at that point. 

As such, if you are looking to build up your pension to fund your retirement and are able to do so, you may wish to take the opportunity. 

However, if you are considering withdrawing pension funds before the next election to avoid any changes, you should exercise caution. 

Withdrawing pension funds prematurely could also mean that your money is no longer in a tax-efficient environment.

An alternative would be to simply ‘crystalise’ your pension pot during the current tax-year while no LTA tax is payable.

This puts the whole pot in a position where there would be more flexibility to avoid any excess tax should the lifetime allowance be reprieved in the future.

While this may be an unnecessary precaution (we don’t know if a future  government  would be successful in reinstating the lifetime allowance), there are no real negative implications for doing so.

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