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Pension tax allowance changes your employees need to know about
The Government will be introducing changes from 6 April 2024 that may affect your employees' tax allowances, if all their pensions combined are likely to be worth over £1 million when they take their money out.
What's changed?
The main change is the removal of the lifetime allowance.
The lifetime allowance was the limit on the amount a person could build up in their pensions over their lifetime and still enjoy full tax benefits. If someone built up more than the lifetime allowance, they may have had to pay a separate tax charge on that amount.
On 6 April 2024, the lifetime allowance will be abolished and replaced with three new allowances - the lump sum allowance, lump sum and death benefit allowance and overseas transfer allowance.
What's the lump sum allowance?
The lump sum allowance refers to the maximum amount a person can take out of their pension without paying tax. They can still take 25% of their pension tax-free, but now there's a maximum limit of £268,275.
If any of your employees have more than £1,073,100 across all their pensions combined, the maximum amount of tax-free cash they can take is £268,275. Any lump sums paid above this level will be taxed at their marginal rate of income tax. This is known as the lump sum and death benefit allowance (LSDBA).
Pension companies like Royal London are required to show any money your employees take out as a monetary amount on their plan documents rather than a percentage.
What your employees will see from us
From 6 April, our systems and documents will reflect the new allowances so employees should no longer see reference to the lifetime allowance.
What your employees need to do
Your employees may have pensions with different pension companies, so the value of their overall pension savings may not be immediately apparent.
If they take any tax-free cash from any of their pensions, they'll need to tell any other pension companies they have pension savings with, the monetary amount they've taken. This amount will show on their statement.
Their pension may have features which mean they can take more than the standard lump sum allowance. For example, their existing lifetime allowance may be protected. We recommend your employees speak to a financial adviser if they think this applies to them.
How we'll let your employees know about the changes
We'll tell your employees about the changes in our April customer newsletter, Pelican Post, and point them towards more detailed information about the changes on our website at www.royallondon.com/pension-allowances (opens in new window). This page will be updated 6 April to reflect new tax year allowances.