The Lifetime Allowance abolition: LGPS learnings

When it was announced that the Lifetime Allowance (LTA) was to be abolished, many working in the Local Government Pension Scheme (LGPS) breathed a sigh of relief - the commonly held assumption was that pensions tax would now become simpler for long service, higher earning members. 

Unfortunately that is not entirely the case. The extent of future complications has become clearer with the publication of the HMRC policy paper 'Abolition of the Lifetime Allowance from 6 April 2024'. In light of this new understanding, there are several steps those working in the LGPS need to take in order to ensure both they and their members are ready ahead of April.

Member communications

We now know that although the planned abolition of the LTA will still have effect from 6 April 2024, other new allowances will also come into play from the same date.

• Tax-free cash from a pension fund will be tested against the Lump Sum Allowance (LSA), which is set at the £268,275 (25% of the LTA).
• A Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100 (the same as the current LTA) will test both tax-free cash sums and pension death benefit lump sums.

Amounts above these allowances will be taxed at the member or beneficiary’s marginal rate. There is no provision to increase either of these allowances in line with any index, so expect them to bite harder over time as member benefits increase. 

So far so complicated, but that’s not the end of it. For example, members will also need to be aware that:

• Those members with LTA protection will have a different LSA based on the amount of their protection. This means for a member with a protected LTA of £1.5m, the LSA will be £375,000 (£1.5m x 25%). 
• A new Transitional Allowance will take account of any LTA used prior to 6 April 2024 and reduce the LSA by 25% of that amount. This means that if 50% of the LTA was previously used, the LSA would be reduced by £134,137.50 (50% x £1,073,100 x 25%).
• An Overseas Transfer Allowance (OTA) of £1,073,100. will also be introduced.

As you can see, pinpointing the exact ramifications of these changes will be difficult for members to work out by themselves, particularly for long service higher earning members. It is crucial that you find an effective way to communicate the changes to your members, providing them with simple breakdowns, realistic examples, and points of contact for their questions. Getting ahead of this can save a lot of turmoil post-April 6.

Internal changes

You should think about changes that may be necessary to your internal processes or systems for example:

• How could Pension Savings Statements be affected?
• Should Annual Benefit Statements include information on the LSA and LSDA?
• How should benefit estimates show the maximum tax-free lump sum?
• Do you need to amend member guides or internal administration guides?
• What should you be telling employers about the new allowances?

It may only be a few scheme members who are affected by the new allowances, but it would be prudent to ensure you are ready to signpost the impact and provide the information they will need. 

How we can help you

Your BW contact can talk to you about the further assistance we can provide in this area should you require it. 

For example we could help you with:

• your member communications through our specialist communications division Drumroll;
• amending internal processes or documentation; and  
• provide training for your administration staff on the impact of the new allowances.