| The Government has confirmed that the Lifetime Allowance regime is to be replaced by a new regime from 6 April 2024. In our view this breakneck timescale carries significant risks. |
1. Chancellor’s Autumn Statement
1.1 On 22 November 2023 the Chancellor confirmed the full abolition of the Lifetime Allowance and the introduction of a new regime from 6 April 2024 based on the previously announced concepts of a lump sum allowance and a lump sum and death benefit allowance. In more detail:
- the lump sum allowance limits the total amount of an individual’s tax – free lump sum allowance to £268, 275; and
- the lump sum and death benefit allowance imposes a total limit per individual of £1,073,100.
Both of the above are subject to any higher amount an individual may be entitled to under valid protections the individual has filed with HMRC.
Pension commencement excess lump sums are subject to marginal rate income tax.
HMRC’s policy paper dated 22 November 2023 and HMRC’s Newsletter 154 published on 30 November 2023 give further details.
1.2 The legislation for the above is in Finance Bill 2023/2024. The Bill was introduced in Parliament on 29 November 2023 following on from draft clauses published on 18 July 2023 for consultation.
As highlighted in our article in October 2023 Pensions Compass (click here), the Government’s ambitious timetable is in our view risky for all concerned including trustees, administrators, members and HMRC itself.
2. Specific areas of risk
2.1 ‘Systems’ risk
HMRC acknowledge that HMRC itself as well as scheme administrators are going to have to change their processes and systems to adapt to the new regime. For scheme administrators this will also mean having to revise member communications.
HMRC are going to have to change their “IT systems and digital services” (HMRC Newsletter 154).
All a bit worrying given the very short lead – in time to 6 April 2024.
2.2 Lump sums under DB schemes
The drafting of the “Pension Commencement Excess Lump Sum” in the Finance Bill is unclear and the exact effect remains to be seen.
2.3 Reporting
Sums paid in excess of the new allowances are to be reportable by scheme administrators to HMRC as Relevant Benefit Crystallisation Events (RBCE) (in place of Benefit Crystallisation Events (BCE) under the pre 6 April 2024 regime).
Scheme administrators will also need to give individual members a statement telling them how much of their allowances have been used up by the RBCE.
2.4 Transitional arrangements
Members taking benefits on or after 6 April 2024 may also have taken benefits (eg from the same scheme or a different scheme) before 6 April 2024. The new legislation will specify how these past benefits are to be valued in arriving at the individual’s available lump sum allowance and lump sum and death benefit allowance as at 6 April 2024.
There will be special rules for those entitled to an actual, as opposed to prospective, existing pension on 6 April 2006.
That is not all. As evidence of complexity upon complexity:
2.4.1 Those members with accurate and complete records of previous tax free amounts received may provide these details to enable schemes to calculate “an alternative transitional calculation“; and
2.4.2 To iron out any problems emerging (or in HMRC’s words, to facilitate the transition from the LTA regime to the new allowances) the Treasury will have power to make “additional necessary legislative changes via statutory instrument” ; this power is to last only to 5 April 2026.
3. Some good news
3.1 tax free elements of trivial commutation lump sums and winding up lump sums are not now to be included in calculating an individual’s available new allowances; and
3.2 there is to be no change to the tax treatment of inherited pensions where the member dies under age 75; likewise it seems that sums becoming held on flexi – access terms after a member’s death will continue to be treated favourably for tax purposes (when the draft clauses for the Finance Bill were published on 18 July 2023 HMRC’s comments seemed to indicate less favourable treatment going forward on deaths under age 75).
Conclusion
In addition to the above points, certain issues raised earlier this year in response to the Consultation on the draft clauses for the Finance Bill have not yet been addressed and further discussion with HMRC can be expected as the Finance Bill progresses in Parliament.