HMRC - Abolition of the lifetime allowance – guidance

In HMRC’s Newsletter 158 — April 2024 they have acknowledged that the legislation to abolish the lifetime allowance still has technical errors.

This means that there are a few specific customer groups that you will need to take care with when providing advice. We have detailed the scenarios that are impacted and HMRC’s suggested action below.

Unfortunately, HMRC has not provided any indication when the corrective legislation will be published.

Lump sum death benefits — payments from funds which crystallised prior to 6 April 2024

Pension scheme newsletter 157  confirmed the payment of a lump sum death benefit from funds which crystallised before 6 April 2024 may be limited by the permitted maximum. This is unintentional. The policy is that the payment of lump sum death benefits from such funds are entirely tax-free. The government will therefore bring forward legislation to resolve this issue.

Until the amending legislation is effective, legal personal representatives may wish to delay requesting the payment of a lump sum death benefit where the payment would be made from funds which crystallised prior to 6 April 2024.

Enhanced protection — transferring to a new provider

Pension scheme newsletter 157 confirmed the government will bring forward legislation to provide that individuals with enhanced protection can transfer their pension savings to a new provider and carry over the benefit of their protection, even though their permitted maximums for a lump sum or lump sum death benefit currently operate on a per arrangement basis.

Until the amending legislation is effective, individuals with enhanced protection may wish to delay transferring to a new provider.

Enhanced protection and primary protection — protected lump sum rights of more than £375,000

Pension scheme newsletter 157 stated that the policy intent is for individuals with enhanced protection or primary protection and protected lump sum rights to be able to take a PCLS over their lump sum allowance of £375,000. It highlighted that HMRC is aware of the issue whereby paragraph 1(b) of Schedule 29 to FA 2004 prevents this and confirmed that the government would bring forward legislation to address this issue.

Until the amending legislation is effective, individuals may either:

• take a PCLS up to £375,000 — in this case the individual would forgo their protected entitlement as any amount subsequently paid would not meet the conditions to be a PCLS.
• delay to the payment of their PCLS in order that they can take their full entitlement — a PCLS can be paid 6 months before and up to 12 months after the individual becomes entitled to it.

Scheme-specific lump sum protection — calculating an individual’s entitlement

Regulation 3 of The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 made changes to paragraph 24 of Schedule 36 to FA 2004. This provides the calculation for the additional lump sum amount where an individual holds scheme-specific lump sum protection. HMRC are aware that this formula double counts certain benefits and therefore does not operate as intended. The government will therefore bring forward legislation to resolve this issue.

Until this legislation is effective, affected individuals may wish to request a delay to the payment of a PCLS under scheme-specific lump sum protection.

Scheme-specific lump sum protection — reduction to an individual’s lump sum allowance

Pension scheme newsletter 157 confirmed that the government would bring forward legislation to provide that an individual’s lump sum allowance is reduced on the payment of a PCLS under scheme-specific lump sum protection by 25% of the total value of that lump sum plus the pension in connection with which it is paid.

Until this legislation is effective, given the technical error with the formula for calculating the additional lump sum amount, affected individuals may wish to request a delay to the payment of a PCLS under scheme-specific lump sum protection.

Scheme-specific lump sum protection — transferring providers

Regulation 3 of The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 made changes to paragraph 24 of Schedule 36 to FA 2004. This provides the calculation for the additional lump sum amount where an individual holds scheme-specific lump sum protection. HMRC are aware that this formula double counts certain benefits and therefore does not operate as intended. The government will therefore bring forward legislation to resolve this issue.

Affected individuals should still be able to transfer their rights to a new provider before the amending legislation is effective. However, given the technical error with the formula for calculating the additional lump sum amount, they may wish to defer the payment of a PCLS under scheme-specific lump sum protection.

Overseas transfer allowance — pre-A-Day benefits

Regulation 4(12) of The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 provides that, where an individual has crystallised benefits prior to 6 April 2024, their overseas transfer allowance is reduced by 100% of their lifetime allowance previously used amount. However, unlike the transitional arrangements for the lump sum and death benefit allowance, there will be no deduction of benefits crystallised prior to 6 April 2006 where the individual has not then had a benefit crystallisation event between this date and 5 April 2024. This is because paragraph 20 of Schedule 36 to FA 2004 does not apply to the overseas transfer allowance provisions. The government will therefore bring forward legislation to provide that the transitional reduction to an individual’s overseas transfer allowance includes pre-A Day pensions in payment.

Until the legislation is effective, affected individuals may wish to defer their request to transfer rights held under a registered pension scheme to a QROPS.

Overseas transfer allowance — benefits crystallised into drawdown

Regulation 4(12) of The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 provides that, where an individual has crystallised benefits prior to 6 April 2024, their overseas transfer allowance is reduced by 100% of their LTA previously-used amount. This would include any amount designated to drawdown. However, should these same funds designated to drawdown be transferred to a QROPS after 6 April 2024, they will again be deducted from the overseas transfer allowance. The government will therefore bring forward legislation to provide that such funds are not double counted against the overseas transfer allowance.

Until the legislation is effective, affected individuals may wish to defer their request to transfer rights held under a registered pension scheme to a QROPS.

Transitional arrangements — PCLS and uncrystallised funds pension lump sum (UFPLS) after age 75

Currently, the payment of a PCLS or UFPLS after age 75 is not a benefit crystallisation event. This is because the individual’s remaining uncrystallised benefits would have been tested against the lifetime allowance at age 75. However, when applying for a transitional tax-free amount certificate, paragraph 129(3) of Finance Act (FA) 2024 only considers lump sums which were paid as a benefit crystallisation event under Part 4 of FA 2004.

The government will therefore bring forward legislation to provide that the transitional tax-free amount considers any PCLS or (tax-free element of an) UFPLS paid after age 75. This will ensure that any transitional tax-free amount certificate issued accurately reflects any tax-free lump sums received prior to 6 April 2024.

Schemes should ensure that this information is included in any transitional tax-free amount certificate issued where relevant, as once the amending legislation comes into force and is applied retrospectively to 6 April 2024, any transitional tax-free amount certificate issued which does not reflect these amounts will be incorrect.