Question:

Looking at the numbers for the new pension allowances, they look very familiar. Has anything actually changed in terms of financial planning now that the lifetime allowance has been replaced?

Paul’s answer:

It’s true the numbers look the same for those clients without protection – £268,275 for the lump sum allowance (which is 25% of the old standard lifetime allowance) and £1,073,100 for the lump sum and death benefit allowance (which is identical to the old standard lifetime allowance). However, the way these new allowances are tested is actually significantly different. We don't have ‘benefit crystallisation events’ anymore, as we did under the lifetime allowance regime. To avoid confusion, they’ve been given a completely new name – relevant benefit crystallisation events! These are payments of lump sums – and it is only lump sums that are tested under the new regime. So, if we take the lump sum allowance, this is tested in three areas:

• The payment of a PCLS
• The tax-free portion of UFPLS payments
• Standalone lump sums

Other benefits, however, are completely unlimited and there is no test. So, for example, if a client takes a £100,000 pension commencement lump sum and then puts £300,000 into drawdown, there's no test on those drawdown benefits.

This represents quite a change. When making pension contributions in the past, the annual allowance was obviously one consideration while the lifetime allowance was another. Going forwards, there is only the limit on tax-free cash – there is no limit on the amount of pension savings you can build up over time anymore. I think this is a real game changer in terms of saving for retirement. Of course, it's nice to receive the tax-free cash portion. However, even if it’s not possible to receive any more tax-free cash, provided a client isn’t going to pay more tax on the way out than the tax relief they’re receiving on the way in, then saving within a pension makes a lot of sense.

Important information

This article provides information and is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. The value of benefits depends on individual circumstances. The minimum age clients can normally access their pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless they have a lower protected pension age. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.

Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

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