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When Chancellor Jeremy Hunt announced that he was abolishing the lifetime allowance charge at last year’s spring Budget, shadow chancellor Rachel Reeves immediately said Labour would bring it back if it was voted into government.
With an election this year, and Labour well ahead in the polls, it makes sense for those with large pension funds – specifically those at risk of breaching the previous lifetime allowance of £1,073,100 – to consider their options. It could save a large tax bill.
Reintroducing the charge would not be as easy as it sounds. A new chancellor could not simply put back the previous legislation – a point made in an excellent report by LCP, written by former pensions minister Sir Steve Webb. In particular, there would need to be detailed transitional arrangements and provision for those who had made contributions in the intervening period.
LCP calculates that reintroduction could affect up to 6pc of those with pension funds approaching retirement, the equivalent of about 250,000 people. Over the years, as the wage inflation and investment growth of legions of auto-enrolled workers carries more over the threshold, still thousands more could face the charge.
Strictly speaking, Mr Hunt did not cancel the lifetime allowance charge last year, rather he reduced the tax rate to nil from April 6 2023. Removing the charge itself will only take place from April 6 this year. Even after that, the lifetime allowance itself will remain as a limiting factor in the amount of the tax-free lump sum that can be taken.
It means that when considering what anti-avoidance legislation may be introduced there are two separate periods to consider, before and after April 2024.
The tax-free lump sum that can be taken remains limited to 25pc of your lifetime allowance. This will typically be £268,275 (£1,073,100 at 25pc), although it will be higher for those who registered for fixed or enhanced protection. Depending on your circumstances it may still be possible to elect for fixed protection at £1,250,000, but the opportunity will cease after April 5, 2025.
The lifetime allowance charge is triggered on so-called “Benefit Crystallisation Events” (BCE). There are nine such events possible, of which the most common are taking an annuity, putting funds into drawdown and a catch up event at age 75.
For those concerned they may be stung by a reintroduced charge, the essential question is therefore whether it could make sense to crystallise pension funds ahead of the next election to escape it.
Obviously, we do not know exactly what legislation a new government would introduce. In particular it is unclear what, if any, forestalling measures this may contain to catch out those making further pension contributions up to the £60,000 annual allowance, and any brought forward allowance, followed by a crystallisation.
Although LCP points out that legislating for this would be difficult, I have a concern that some form of catch-all could be introduced into the final benefit crystallisation event at age 75. Even without forestalling rules, crystallising the whole fund would not necessarily eliminate the problem completely, because the BCE at age 75 includes the amount by which the crystalised fund has increased since the previous benefit crystallisation events.
The Chancellor abolished the lifetime allowance partly as a solution to the problem of consultants and senior doctors retiring early. Labour says it would solve the issue a different way.
This would probably involve offering these workers the scheme already available to judges – although, as a personal view, I never understood why judges were deemed more deserving of special treatment than doctors.
It may be that you want to take advantage of the opportunity to crystallise your fund now but continue to make contributions and possibly maximise your allowable contributions.
Once you start taking a pension, the amount you can contribute each year is limited to £10,000 (the Money Purchase Annual Allowance, or MPAA). However, there is no requirement to take a pension when the fund is designated into drawdown, so you can continue to have flexibility on this.
This approach may appeal to those currently working and paying tax at the higher or additional-rate but who expect to be in a lower tax band on retirement. You may also be keen to stay out of the 60pc tax band above £100,000, where personal allowances are reduced.
Incidentally, you would almost certainly want to take your full tax-free lump sum at the same time, because the opportunity to do so ceases after 12 months from designating the fund into drawdown. Doing this would not trigger the £10,000 MPAA cap.
It may be tempting to delay taking any action until the election is called. However, there are two problems with this. Firstly, your fund manager may have their own rules to be complied with, and which may need time to take into account.
Secondly, they could suddenly become overwhelmed with requests and be unable to deal with them all.
My suggestion is that anybody with a fund which is more than the current lifetime allowance, or may grow to be, should consult their manager or pension adviser and clarify their options.
I do not want any Telegraph readers looking back in 12 months’ time regretting that they have missed the opportunity.
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