News Alert 2023/06
At a glance
Following this year’s Autumn Statement, the Finance Bill has been published containing within it all the necessary detail to carry out the abolition of the Lifetime Allowance which is to take effect from 6 April 2024. This lays down a challenge to trustees, scheme sponsors and above all, scheme administrators to get ready to operate a new pensions tax regime in four months’ time.
Key actions
Trustees
- Ensure that your scheme administrator will be able to operate the new regime from 6 April 2024
- Decide whether information about the new regime needs to be provided to your scheme members now, such as those receiving retirement benefit quotations intended for dates from 6 April 2024
Scheme sponsors
- Consider whether any of your current projects could be impacted and if so whether it is better to wait for the new regime or seek to complete under the current legislation
- Assess, with your trustees, whether any benefit design no longer works after 6 April 2024, such as if pension accrual is restricted by an LTA cap, and ensure appropriate action is taken before then
Scheme administrators
- Understand how all your benefit quotation processes are impacted and prioritise the systems/communications updates required in very short timescales to ensure that they can operate the new regime from 6 April 2024
- Digest and implement amended reporting requirements, including those to members and to HMRC, so that you can operate them from 6 April 2024
The Detail
A Finance Bill, implementing a number of decisions from this year’s Autumn Statement (as set out in a policy paper), was published on 29 November 2023. Getting on for a third of the Bill is taken up with all the necessary detail to carry out the abolition of the Lifetime Allowance which is to take effect from 6 April 2024.
The proposed pensions tax legislation is set out in Schedule 9, running to 98 pages and divided into six Parts. Some of it is familiar as a 40-page draft was issued for consultation in July 2023, but there are some significant changes to the July draft and a whole host of fresh material has been added.
In this News Alert we highlight some of the new and adjusted material in the Bill from that published in July and reflect on the challenges that the new tax regime will bring, but first we set out the key change brought in by the Bill – the replacement of the Lifetime Allowance with two new lump sum allowances.
No more Lifetime Allowance, but two new allowances – for tax-free retirement cash and for other tax-free cash
From 6 April 2024 the Lifetime Allowance will be removed. One consequence is that no “limit” or “allowance” will apply to pension-style benefits (pension or DC drawdown). These will simply be subject to income tax (as in fact they have been since the abolition of the Lifetime Allowance charge from 6 April 2023).
With the Lifetime Allowance removed, two new limits will be introduced specifically to control tax relief on lump sums:
- The “lump sum allowance” – which is a cumulative limit of £268,275 on the tax-free part of lump sums at retirement. This allowance is eaten into by payment of a pension commencement lump sum and the tax-free element of an uncrystallised funds pension lump sum
- The “lump sum and death benefit allowance” – which is a cumulative limit of £1,073,100 on the total amount of the tax-free part of lump sums and lump sum death benefits payable to and in respect of a member. This allowance is reduced by payment of a pension commencement lump sum, the tax-free element of an uncrystallised funds pension lump sum and that of a serious ill-health lump sum (which is typically tax-free) and the tax-free element of any authorised lump sum death benefit (other than charity lump sum death benefits and trivial commutation lump sum death benefits).
To the extent that payment of any lump sum takes the total lump sums payable to and in respect of a member over the relevant allowances, the excess is subject to income tax.
Those with old-style Lifetime Allowance protections will have higher allowances (noting that the window for new applications for Individual Protection 2016 and Fixed Protection 2016 will close from 5 April 2025). All these new allowances are frozen as there is no provision in the Bill for any of them to increase in future.
Our viewpoint
This is all largely as had been set out in July. And compared to the current regime, many members outcomes are likely to be unchanged; and in some circumstances, those starting to draw large DB pensions or with large DC funds could have less income tax to pay.
One welcome change from July is that the new lump sum allowances are not now going to be reduced by the payment of a trivial commutation lump sum or winding up lump sum. This averts what could have been a potential extra administration burden.
No to DB freedom and choice
One surprise in July was that the draft Bill allowed schemes to pay taxed lump sums beyond the usual tax-free allowance, so effectively extending the 2015 DC Freedom and Choice flexibilities to DB schemes. When this became apparent HMRC said that this was not its intention, so it is no surprise now to see that the Finance Bill has addressed this.
The tax-free “pension commencement lump sum” now retains its familiar limit of a quarter of the overall HMRC value of the benefits taken. A new “pension commencement excess lump sum” has been introduced for taxed cash out, which is only available when all of the individual’s lump sum allowance has been used. It also has to be paid in connection with a pension and cannot exceed a permitted maximum. However, that permitted maximum appears on first reading to be significantly less, at least in some circumstances, than what is available under the current regime.
Our viewpoint
We had expected to see a change come through from the July proposals, but the construction of the “pension commencement excess lump sum” seems to result in those who have used up their lump sum allowance potentially not being able to cash out all of their excess as they are currently able to do.
Death before age 75 tax break to continue
In July 2023 the Government announced its intention to apply income tax on unused defined contribution benefits on death before age 75. However, at the Autumn Statement it was made clear the Government was not going to proceed with this (see Pensions Bulletin 2023/47) and as a result this change is not in the Finance Bill.
Out with the old, in with the new
Inevitably, with something so fundamental as the Lifetime Allowance, its abolition necessitates a thoroughly comprehensive trawl through the pensions tax legislation that has been put in place over nearly 20 years, striking out all references to the Lifetime Allowance, the associated Benefit Crystallisation Events and then substituting references at the appropriate places to the two new lump sum allowances and their associated “relevant benefit crystallisation events”. HMRC acknowledged that the July 2023 draft was a work in progress. Hopefully, the job has been pretty much finished with the much- expanded Finance Bill clauses. However, issues may emerge on detailed analysis.
Amongst the new material is the following:
- A new Part 3 that deals with necessary changes to the tax treatment of unregistered non-UK schemes, including how the overseas transfer charge applies to transfers to QROPS. The changes extend to amendments to supporting regulations
- A new Part 5 relating to the provision of pensions information between various parties, which for the most part is set out in regulations. The changes, at the regulation level, include to the annual Event Report and to a whole host of individual reporting requirements
- A much-extended Part 6. As before, this confirms that the changes are to take place for the 2024/25 tax year onwards, but it now goes on to set out some important transitional provisions which are discussed in the section below
Our viewpoint
Scheme administrators will need to study all these new and modified information provision requirements in Part 5 to be able to successfully operate the new regime from 6 April 2024.
Perhaps of greatest significance is a new requirement in the Event Report to set out, for each individual, every single lump sum payment taken from the scheme in that year that will reduce that individual’s available allowances. This could create an intolerable burden for administrators. We had hoped that this would not be in the Bill as it is not clear why such reporting is needed; under the current legislation HMRC does not ask for details of every single benefit crystallisation event.
Transition for those who have drawn some of their benefits before 6 April 2024
Inevitably, at 6 April 2024 there will be some individuals who have started to take benefits under the old regime, but have yet to take all of them – and indeed may still be building up pensions savings. It would be unfair for them to ‘double up’ with a new set of allowances.
In recognition of this, much of the Part 6 transitional provisions are taken up in setting down an administrative process under which those who have taken benefits before 6 April 2024 have the 6 April 2024 starting positions for their lump sum allowance and lump sum and death benefit allowance established. In a simple case, there are zero future allowances where pre-6 April 2024 benefits taken exceeded the Lifetime Allowance. Otherwise, the two lump sum allowances are reduced by 25% of the Lifetime Allowance that has been used up (except for certain serious ill-health and death transitional cases where the lump sum and death benefit allowance is reduced by 100% of the Lifetime Allowance that has been used up).
However, these deductions are replaced if the individual can provide a “transitional tax-free amount certificate” that sets out what the deductions should be. It is not clear how HMRC intends this to work and guidance would be welcome. The legislation itself says that any scheme administrator that is validly approached must provide such a certificate within three months of request, keep it under review and issue a modified certificate as necessary. The legislation sets out how the calculations should be carried out, and this is driven by the individual supplying “complete evidence” of all the lump sums and lump sum death benefits received, from presumably every scheme they have been in.
Our viewpoint
When paying out lump sums, scheme administrators should be able to operate the default approach from their current enquiry processes to establish how much Lifetime Allowance the individual has available. However, the default approach may adversely affect members who have taken less than 25% tax-free cash for past benefits if they might use up all of their two new allowances when taking further benefits.
Consequently, administrators will need to make members aware of this and stand ready to provide these new certificates. For these, they may need to establish new processes including verification of the information being supplied.
More changes to come?
Finally, in recognition of the incredible complexity of the changes being made, the Bill takes wide powers to make further changes as needed, with some being permissible until 5 April 2026. We may see a number of changes over the coming years as issues are identified with the practical operation of the new regime.
A warning
The Lifetime Allowance will shortly be no more, but this is just for post 6 April 2024 events. The old regime remains in place for pre-6 April 2024 events and as such will continue to be relevant to exercises carried out after this date, but intended to have pre-6 April 2024 retrospective effect, such as for GMP equalisation.
Our viewpoint
It took less than 3 pages of legislation to abolish the Lifetime Allowance charge (see Pensions Bulletin 2023/13) and now getting on for 100 pages to abolish the Lifetime Allowance. But although the amount of legislation is fearsome, a lot of it is little more than consequential to removing the Lifetime Allowance and replacing it with the two new lump sum allowances.
Now the burden switches to scheme administrators who will need to assimilate all this new material and build new systems and processes in a very challenging timeframe. At least the release of the Bill with 6 April 2024 hardcoded at a number of places, signals that all this will happen and before the earliest likely date for the General Election.
Unfortunately, what is not clear is how enduring the new regime will be. The Labour Party is opposed to the abolition of the Lifetime Allowance and has promised to reintroduce it, although that is not without its challenges as we explored in our recent paper Could the Lifetime Allowance come back?.
This News Alert does not constitute advice, nor should it be taken as an authoritative statement of the law. If you would like any assistance or further information on the issues raised, please contact the partner who normally advises you at LCP via telephone on +44 (0)20 7439 2266 or by email to enquiries@lcp.uk.com.