Kirk Rice Blog

New 2024 Pension Allowances ExplainedWritten on September 30, 2024 by Michael Powell

Michael Powell – Financial Planning Partner – Kirk Rice

On 15th March 2023, the chancellor announced the abolition of the Lifetime Allowance. From 6^th April 2024 two new allowances were introduced:

1. The first limits the tax-free cash (in law defined as Pension Commencement Lump Sum – PCLS) from pensions in your lifetime.
2. The second limits the tax-free amount after your death before the age of 75.

These new allowances are linked to your remaining Lifetime Allowance at 5^th April 2024. Your new Allowances are reduced by tax-free cash and income decisions you made between 6^th April 2006 until 5^th April 2024.

If you started or took any pension benefit in that period, you should gather your records of those decisions. Each pension provider will have issued a Benefit Crystallisation Event letter or statement. You may need to request copies of these.

1. Individual Lump Sum Allowance (ILSA)

This is the maximum tax-free cash (PCLS) you can take during your lifetime and is fixed at £268,275 and not expected to increase. 25% of the value of your remaining unused Lifetime Allowance converts to be your new allowances. If you held Lifetime Allowance (LTA) protection your ILSA is set at 25% of your personal LTA figure less any usage.

Most pensions pay up to 25% of the value (different calculation for Defined Benefit schemes) as tax-free cash but will ask for confirmation of your remaining ILSA before making new payments.

All other withdrawals (except those to pay product and advice fees) from pensions are taxable at marginal income tax rates.

There are pensions with a tax-free cash sum greater than 25% (Scheme Specific Protected Lump Sum – SSPTFC). People with SSPTFC should be careful about the order in which they take benefits as it can adversely affect the total tax-free cash they can receive.

2. Individual lump sum and death benefit allowance (ILSDBA)

ILSDBA is the maximum tax-free cash payable after your death from all your pensions. The standard ILSDBA is £1,073,100 and not expected to increase. If you hold Lifetime Allowance (LTA) protection your ILSDBA is set at your higher personal LTA figure. The ILSDBA is reduced by any amount previously taken as an ILSA and employer Registered Death in Service payments.

If an employer Death in Service life assurance is an Excepted Lives or Relevant Life plan these are not included in the ILSDBA calculation.

Action

• If you started a pension income without taking any tax-free cash (often option 1 in defined benefit company pensions) this will have reduced your tax-free cash entitlement under the new rules because of the link to your Lifetime Allowance usage.
• If you also have other pensions where you can take tax-free cash, you should act now to recover your unused ILSA and ILSDBA. Otherwise, you and your beneficiaries will pay more income tax than you should. Once you start any new pension benefit after 5^th April 2024 you cannot apply for the adjustment.
• Employers should review their benefit arrangements to establish the best outcome for their people. No one setting up these schemes envisaged there would be tax to pay on life insurance. It is easy to make the change.
• Everyone should check their own circumstances or ask their adviser to check if they could benefit from applying for an adjustment to the ILSA and ILSDBA. If you pay an Ongoing Adviser Charge on your pensions, then your adviser may not charge a fee for establishing your position on this.

If you would like advice regarding pensions or require financial planning, call us on 01344 875 00 or email info@kirkrice.co.uk 

Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.