From 6 April 2024 New Allowances replace the LTA regime. Simple enough, but applying the new Allowances and the interaction with any benefits taken pre – 6 April 2006 is complex.
Previous Pensions Compass articles: click here “Dismantling the Lifetime Allowance” October 2023 and here for “Plain sailing or stormy waters?” December 2023.
Recap
The two new lump sum Allowances (New Allowances) from 6 April 2024 are:
- Lump Sum Allowance (tax free) fixed at £268,275; and
- Overall Lump Sum and Death Benefit Allowance fixed at £1,073,100.
Where a member has certain “protections” and/or “enhancements” the above amounts are increased.
Problem areas
Legislation – Finance Act 2024 received Royal Assent on 22 February 2024. It abolishes the LTA regime and provides for the New Allowances from 6 April 2024; in addition, it seeks to mesh the New Allowances with the LTA regime where members have crystallised some benefits before 6 April 2024 and receive further pension benefits on or after 6 April 2024. This process is not helped by having to convert the percentage of pre – 6 April 2024 LTA used up into a post – 6 April 2024 monetary amount.
Regulations are needed both to flesh out the Finance Act provisions and also to correct parts of the Finance Act. It is hoped these Regulations will be made ahead of 6 April 2024. Some areas which the Regulations may address:
- Scheme rules limiting benefits to the LTA: legal advice should be obtained on how any such rules (and rules under any top up unregistered scheme) are to be interpreted taking into account any overriding new Regulations;
- Pensions commencement excess lump sums (PCELS): this new type of authorised benefit is similar, but not identical to, the lifetime allowance excess lump sum (LTAELS) which schemes could provide pre – 6 April 2024 if they chose to do so. Unlike LTAELS, the PCELS must be paid in connection with pension being payable. Finance Act 2024 contains provisions aimed at LTAELS provisions being interpreted as providing PCELS post 6 April 2024 so far as possible. It is hoped the new Regulations will also correct errors in the PCELS provisions in Finance Act 2024. So, PCELS is a tricky area on which advice may be needed; and
- Reporting to HMRC and to members: there are amendments to the circumstances and content for certain reports to be given by scheme administrators.
Revising HMRC’s Pensions Tax Manual – HMRC say they will be publishing practical guidance and worked examples in their Pensions Tax Manual, hopefully prior to 6 April 2024. These amendments will hopefully clarify how to calculate and apply the New Allowances in different situations.
Timing
Trustees, employers, scheme administrators, members, and professional advisers will all need to have a good understanding of the new rules. However, because the changes are happening so close to 6 April 2024, gaining a good understanding and changing communication materials and reporting systems in time for 6 April 2024 is a very tall order. Indeed in the Parliamentary debate on the Finance Bill on 5 February 2024, the Opposition Shadow Financial Secretary quoted from Wedlake Bell’s Bell’s October 2023 Pensions Compass (Click here for the article in Part 3) that “replacing the LTA at breakneck speed is very risky for all parties including trustees, administrators, members and indeed HMRC itself.”
Trustees’ responsibility
Ultimately, scheme trustees are responsible for the overall proper running of a scheme and they and any person appointed by them to fulfil HMRC “scheme administrator” obligations need to understand the new legislation. Scheme trustees should pro-actively liaise with their scheme administrators and other advisers including legal advisers. Trustees should ask their scheme administrators what administrative steps are in hand to comply with the New Allowances regime.
What should scheme Trustees be doing? This will vary from scheme to scheme and advice will be needed on a scheme specific basis. Trustees should consider whether any one or more of the following need are needed:
- Rule amendments:
- Review and revision of scheme booklets;
- Review and revision of member communications; and
- Compliance with new reporting requirements.
Transitional tax free amount certificates (TACs)
Some of the Finance Act 2024 provisions are designed to make life easier e.g. in applying the New Allowances to benefits taken on or after 6 April 2024, a standard assumption that 25% of a member’s benefits drawn before 6 – April 2024 consist of a tax free lump sum. Alternatively Finance Act 2024 permits members to substitute a lesser scheme specific amount by providing “complete evidence” they have used less than 25% prior to 6 April 2024, thus freeing up more of their tax free Lump Sum Allowance post – 6 April 2024 than would otherwise be the case. These Finance Act provisions are procedurally complicated. For instance, no forms are prescribed for the member’s application or the ensuing TACs. Advice will be needed here particularly as regards including any legal disclaimers.
Ultimately, will all this be a wate of time?
The Government Opposition say that, if elected, they will reinstate the LTA regime except for certain workers. Whether this happens and the precise effect on the New Allowances from 6 April 2024 are unknowns. One would hope such changes would not be retrospective and that those who have relied on the new regime from 6 April 2024 will be “protected” from any subsequent LTA reinstatement. Hardly a settled position for members planning for retirement !