The new Labour government held its first budget on 30 October 2024. The previous government had delivered their last budget on 6 March 2024, and despite a number of rumoured changes, many of the allowances regarding pensions didn’t change. However, new legislation was proposed regarding how Defined Contribution (DC) pensions are treated when a member dies.
The following sets out the position at the time of this communication.
Inheritance Tax (IHT)
Currently if a member of a DC pension dies, they’re able to pass their pension on to a beneficiary. This can be paid free of tax depending on the policy holder’s age at the time of their death.
It has been proposed that this will no longer be the case and inherited DC pensions upon death, regardless of the age of the policyholder, will be subject to IHT. This proposed change is planned to come into force in April 2027.
At the time of writing, this legislation is going through consultation, which is due to run until 22 January 2025.
The State Pension
The triple lock - the basis for how the State Pension increases each April - will be retained for the duration of this parliament. The State Pension is due to increase by 4.1% on 6 April 2025.
To find out more about the State Pension and the triple lock, click here.
Pension allowances
Since our last newsletter there have also been some changes to the pension allowances set by the government that determine when a member pays tax on their pension savings.
The Annual Allowance (AA) The AA is the amount of money you can save in pension benefits each year without incurring a tax charge. This is set at £60,000 for the 2024/2025 tax year.
Pension Commencement Lump Sum (PCLS) When you start drawing your pension you can choose to receive a tax-free lump sum payment of up to 25% of your pension. The maximum amount you can claim tax-free is currently £268,275.
Money Purchase Annual Allowance (MPAA) When you start drawing money from a DC pension, the amount you can pay into any other DC pensions without paying a tax charge is limited by the MPAA, which is currently set to £10,000 per tax year.
Taking a PCLS would not trigger the MPAA as this is tax-free cash and not income.
The Tapered Annual Allowance (TAA) The TAA is the point at which the AA is reduced for high-income individuals. Affected members will have their AA reduced by £1 for every £2 their ‘adjusted income’ is over £260,000. This continues until the minimum allowance is reached, which is £10,000.
Adjusted income is taxable income, plus pension contributions, including those from your employer. The government website has more information on how to calculate income for the TAA here.
Carry Forward It might be possible for more than your AA to be saved into your pensions while still benefitting from tax relief, by using unused AA from any of the three previous tax years. This is known as Carry Forward. There’s still the possibility of using Carry Forward if you’re subject to the TAA, but not if you’re subject to the MPAA.
The rules around this are complex and you should take financial advice before deciding to use Carry Forward.
Lifetime Allowance (LTA) Prior to 6 April 2024, the LTA was the maximum value of pension benefits (excluding any State Pension) that you could receive before having to pay a tax charge. This was abolished from 6 April 2024 and replaced with the three separate allowances below:
Lump Sum Allowance (LSA) You can normally choose to exchange up to 25% of your pension for a tax-free cash lump sum (this is your PCLS). The LSA limits the amount you can exchange in this way to £268,275.
Lump Sum and Death Benefit Allowance (LSDBA) The LSDBA limits the total amount of tax-free lump sums that can be paid out to £1,073,100. Any lump sums you have taken that are included in the LSA, plus any serious ill-health or death benefit lump sums, count towards this limit.
Overseas Transfer Allowance (OTA) This is the maximum amount that you can transfer to a Qualifying Recognised Overseas Pension Scheme without incurring a tax charge. The OTA is currently set at £1,073,100. Any benefits in excess of the OTA are subject to a 25% overseas transfer charge which must be deducted from the payment.
Rules around taxation and pensions can be complex. If you’re making important decisions about your pension savings or your retirement you should get independent financial advice from a qualified financial adviser. You can visit the MoneyHelper website if you need help finding an adviser.
We’ve provided some useful links for further information about these allowances:
