The lifetime allowance (LTA) was effectively abolished from April 2023. Previously, those who had pensions savings in excess of £1,073,100 would be charged a penal rate when accessing the excess, or on other circumstances where the LTA was tested such as reaching the age of 75 or when transferring pensions funds to qualifying recognised overseas pension schemes (QROPS).
However, almost immediately following the abolition announcement, Rachel Reeves, the shadow chancellor, stated that the Labour Party would reverse the change.
The Labour Party has been remarkably silent on this topic ever since, with the shadow cabinet minister Tulip Siddiq suggesting in October 2023 that the party’s stance on the LTA was ‘still being decided’.
In its simplest form, reversing the changes could simply mean that the LTA is reinstated. It could be set at the previous amount of £1,073,100 or perhaps increased for example, to take account of inflation. The LTA has a chequered history; it has been increased, decreased and frozen before being abolished. In previous years when the amount of the LTA has been reduced, the incumbent government also provided some form of protection for those who would be adversely affected. So, it is possible that an incoming Labour government would provide protection for those who are negatively impacted on the reintroduction of the allowance and associated charges.
Any protection is an added complication, and previous protections have generally come with a condition that no further contributions can be made to the pension. So, what should you do if you think that you could be subject to a LTA charge in the future if it was reinstated?
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There is a ready-made solution which has been around for a while now. The principle behind QROPS was conceived for those who had built up pensions in the UK and were moving overseas. The idea was to make it simpler for those individuals to move their pension to their new country of residence. Pension schemes meeting the conditions to be classed as QROPS were outside the now abolished LTA regime. This means that if you transferred your pension pot to a QROPS, whilst the value was within the LTA and it subsequently grew in value beyond that, there could not be an LTA charge.
What is less well known is that UK residents who have no intention of moving abroad, can also potentially become a member of a QROPS and consequently, could take advantage of the exemption from the LTA charge when it existed, whilst still benefitting from the tax-free amount of 25% when accessing the funds. This beneficial treatment of QROPS funds in excess of the LTA continues for the time being, but could be changed by a Labour government if they choose to reintroduce the LTA.
Having said that, making a transfer of your pension fund should not be undertaken lightly.
Existing anti-avoidance legislation and other regulations mean there are some hoops to consider before taking any action. As its name suggests, this is an overseas pension plan and in order to get recognised status, the plan has to comply with certain HMRC criteria.
Individuals should also be comfortable that the overseas transfer charge (OTC) will not apply as getting this wrong will be expensive, potentially leading to a charge of 25% of the value of the pension pot. There is an exemption from the OTC as long as the scheme member remains a UK resident for five years following the transfer and the QROPS is based in an EEA country or Gibraltar.
On the downside, contributions to the QROPS will not attract tax relief but contributions to a UK pension plan can continue and relief will be available on those.
Exit options should also be reviewed as some QROPS are far more restrictive than UK plans. However, Malta has changed its domestic legislation to enable resident QROPS to offer flexi-access in the same way as UK plans.
It is clear that those with substantial pension pots should consider their position. After all, it remains to be seen whether pensions tax rules get better or worse under a new Labour government.