Industry update - removal of lifetime allowance
Pensions Industry Update – Removal of Lifetime Allowance – Update 1
As announced at the Spring Budget, draft legislation (The Finance Bill 2023-24) regarding the removal of the Lifetime Allowance, expected to be effective 6 April 2024, has been published by the Government.
What changes have been proposed?
The changes to Pensions tax legislation look to be pretty complicated. This will include:
- Abolition of the Lifetime Allowance
- Further clarification on how lump sums and lump sum death benefits will be taxed through the creation of new tax-free allowances.
- the position of individuals with LTA protections, lump sum protections or LTA enhancement factors
- the required changes to Benefit Crystallisation Events – what data will need to be gathered, recorded, and reported.
Two new allowances will be created – the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance.
The limit amount of Pension Commencement Lump Sum that an individual can take from all registered pension schemes across their lifetime will be known as the Lump Sum Allowance. This will initially be set as the lower of £268,275 or 25% of benefit crystallised. Tax-free elements of certain other lump sums, such as an UFPLS and trivial commutation and winding-up lump sums, will also be brought within scope and count for the purposes of this allowance.
A new overall “lump sum and death benefit allowance” of £1,073,100 is also being introduced. This will limit the total amount of tax-free lump sums payable to or in respect of an individual across all registered pension schemes. As well as including the PCLS and tax-free elements of other lump sums, death benefits which are payable tax-free will also count towards the lump sum and death benefit allowance.
For both allowances, any lump sum payment above the allowance will be taxable at the individual’s (or beneficiary’s) marginal rate (rather than triggering an unauthorised payment as current).
Individuals holding LTA protection will have higher allowances.
Benefit Crystallisation Events
Many of the current Benefit Crystallisation Events will become redundant. Only payment of lump sums under the new allowances will be BCEs.
To be removed:
- BCE 1 – funds are designated to provide a member with a drawdown pension
- BCE 2 – member becomes entitled to a scheme pension
- BCE 3 – scheme pension already in payment to a member is increased beyond a permitted margin
- BCE 4 – member becomes entitled to a lifetime annuity under a money purchase arrangement
- BCE 5 – a member reaches their 75th birthday under a defined benefits arrangement or a collective money purchase arrangement without having drawn all or part of their entitlement to a scheme pension and / or lump sum
- BCE 5A – a member reaches age 75 with a drawdown pension fund or flexi-access drawdown fund
- BCE 5B – a member reaches age 75 under a money purchase arrangement, other than a collective money purchase arrangement, in which there are remaining unused funds
- BCE 5C – a member dies before their 75th birthday and relevant unused uncrystallised funds remaining at death are designated, on or after 6 April 2015 but before the end of a 2-year period, to provide a dependants’ flexi-access drawdown pension or a nominees’ flexi-access drawdown pension
- BCE 5D – a member dies before their 75th birthday and relevant unused uncrystallised funds remaining at death are used to provide entitlement to a purchased dependants’ or nominees’ annuity.
- BCE 6 – member becomes entitled to a relevant lump sum
- BCE 7 – a relevant lump sum death benefit is paid on the death of the member
- BCE 8 – member’s benefits or rights are transferred to a qualifying recognised overseas pension scheme (QROPS)
- BCE 9 – other relevant lump sums
What guidance has been published?
A Policy Paper has been published https://www.gov.uk/government/publications/abolishing-the-pensions-lifetime-allowance/abolition-of-the-lifetime-allowance.
More information on transitional arrangements and effects on administration processes are anticipated, and of course this legislation is only in draft form, so changes can be expected before the Bill becomes law.
What are we doing?
This is a significant change, and system level changes will be needed. We are in the process of analysing requirements and planning changes, based on the draft legislation.
Clients should also review their own processes to identify any changes needed. With no information from the Government as to when final legislation will be provided, and implementation still expected on 6 April 2024, timescales are likely to be tight. We are on hand to help clients with this analysis and implement any changes identified.
Please let your Client Manager if you have any feedback or wish to chat about this.
Nick Brain FPMI| Pensions SME