News | October 5, 2023


Key point
The proposed new tax regime replacing the LTA at breakneck speed from 6 April 2024 is very risky for all parties including trustees, administrators, members and indeed HMRC itself.

Our main concerns are reflected in these Q and As:

1.Q. The new regime in the Draft Clauses published by Government on 18 July 2023 significantly differs from the existing LTA regime. Can this sensibly be done to take effect from 6 April 2024?

A. No, not in our view. Some of the changes are fundamental e.g. moving from a record of the percentage of the member’s LTA used on benefits being paid, to a system of monetary value – historical records of monetary values may be difficult/impossible to find.

Trustees and administrators will struggle to adopt  appropriate new systems and design communications by 6 April 2024.

2.Q. How do things look purely from the legislative perspective?

A. Not good. The Consultation on the Draft Clauses closed on 12 September 2023. HMRC have received many detailed comments from various bodies e.g. from the Association of Pension Lawyers and the Association of Consulting Actuaries. HMRC now need time to consider these comments and to develop their considered response, as well as amending the Draft Clauses for insertion in Finance Bill 2023-2024 when published.

As yet the date for publication of Finance Bill 2023-2024 is unknown.

Once published, the Bill will go through its Parliamentary stages in the House of Commons and House of Lords before receiving Royal Assent. The Opposition, which opposed the Government’s pension tax reforms earlier this year,  may well take issue. The General Election has to take place no later than January 2025 – political point scoring (on both sides) may overtake sound judgement. 

3.Q. Are there specific problems with the Draft Clauses in addition to those above?

A. Yes, here are some main concerns:

  • It seems tax free lump sums under DB schemes are to be uncoupled from the authorised payments regime – meaning that DB members could access large lump sums in excess of the tax free amount with only marginal rate income tax on the lump sum excess, instead of a 55% unauthorised payments charge. This would put DB members on a par with the “Freedoms” enjoyed by DC members; in their comments HMRC ask about safeguards in these circumstances, such safeguards would have to be many and detailed just as in the DC world.
  • Depending on the wording of scheme rules, the removal of  the “lifetime allowance” could result in benefits of some members being unintentionally inflated; accordingly, legislation would need to contain wording to prevent this, at least unless and until the scheme’s employer and trustees decide otherwise on a scheme by scheme basis.
  • There are indications income tax may be applied to death benefits where a member dies under age 75.
  • Transitional provisions (likely to be complex) are needed e.g. a member dies prior to 6 April 2024 but the death benefit is paid on or after 6 April 2024.

Conclusion: the new tax regime for registered pension schemes introduced under Finance Act 2004 had 2 years to bed down until coming into force on 6 April 2006. Although the Draft Clauses are not as wide ranging in their effect, they make fundamental changes in key tax areas  – rushing them into force on 6 April 2024 is best avoided.

N.B. Chancellor’s Autumn Statement on 22 November 2023 – it remains to be seen whether dismantling the lifetime allowance proceeds and, if so, the timescale.