More ‘destruction testing’ of the Finance Bill 2024 provisions
I usually try to write an article here every fortnight, however we are not living in ordinary times!
This, then, is my second article today looking at possible anomalies with the Finance Bill 2024 provisions.
The topic here concerns Trivial Commutation Lump Sums, which are currently legislated for in Paragraphs 7 – 9 of Schedule 9 ?of the Finance Act 2004.
There is currently a ￡30,000 ‘commutation limit’ that applies for Trivial Commutation Lump Sums. The value of a member’s crystallised and uncrystallised rights across all registered pension schemes must be assessed and, if the aggregate value exceeds the commutation limit, Trivial Commutation is not possible.
Currently, the value of a member’s crystallised rights is assessed as:
- the value of the member's relevant crystallised pension rights on 5th April 2006, calculated in a prescribe manner,
plus
- the aggregate of the amounts crystallised on benefit crystallisation events (BCEs) in the period beginning with 6th April 2006 and ending with the ?nominated date.
From 6 April 2024, of course, the second element here will not work, as the taking of many benefits will not be BCEs.
As such, Clause 30 of Schedule 9 of the Finance Bill 2024 amends the second point above to read:
the amount given by the formula: ((A ? B) × 4) + C
where—
“A” is the member’s lump sum allowance;
“B” is the amount of the member’s lump sum allowance that is available (see paragraph 12A) on the payment of the lump sum in question;
“C” is the amount of any serious ill health lump sum already paid to the member so far as it was not chargeable to income tax.”
领英推荐
The question, of course, is whether this will work as intended? The answer is apparently not!
Consider a member of a Defined Benefits scheme who only has benefits within ‘this’ scheme (so I don’t have any pre 6 April 2006 pensions to worry about and no other benefits to consider).
Let’s say that the member retires and takes their benefits as a scheme pension in June 2024. The member takes ‘full pension’ (so no Pension Commencement Lump Sum -PCLS - is taken). We’ll assume that the scheme pension is ￡40,000 a year.
In July 2024, the member asks if she can trivially commute the scheme pension in payment. The intuitive answer here would be “no”, but what does the new formula say?
The member’s Lump Sum Allowance (LSA) would be ￡268,275 (I am assuming that the standard LSA applies). A in the new formula is ￡268,275.
The member’s available LSA would also be ￡268,275. No PCLS was taken, so there has been no ‘event’ that uses up any of the member’s LSA. B in the new formula is also ￡268,275
There has been no Serious Ill Health Lump Sum paid, so C in the new formula is zero.
The value of the member’s crystallised rights, as per the new formula, is:
((￡268,275 - ￡268,275) X 4) + 0
Whilst maths may not be my strongest suit, I am pretty sure that the result here is zero. This is clearly well within the ￡30,000 commutation limit, so that the member could indeed trivially commute the ￡40,000 a year scheme pension.
?I cannot say for certain, however I don’t think that this is HMRC’s intention.
We will have to wait and see whether HMRC amends the draft legislation on this point, however for now this does indeed appear to be one aspect of the legislation where the wheel does come off.
I would like to thank the Aries member who flagged up this apparent anomaly with us.
Aries Insight?provides comprehensive and detailed guidance on the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.? If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.
Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.
Partner at Lane Clark & Peacock
9 个月Thanks for bringing to everyone’s attention the flaw in the proposed rules for establishing the value of crystallised pension rights for testing against the ￡30,000 trivial commutation lump sum limit.?The limit clearly only works, in the broadest sense, if there was a lump sum taken when the pension was crystallised. As the rules for the valuation of uncrystallised pension rights are not disturbed it seems that the ￡30,000 limit continues to work if seeking to establish whether a pension yet to be taken can be commuted in full on triviality grounds. And that may be the clue to how HMRC need to resolve this issue.?They clearly, in my view, need to value the crystallised pension directly, rather than indirectly through an assumed associated lump sum that may not have actually been taken. There are examples elsewhere in the Finance Bill where a pension is valued directly, by calling on the section 276 valuation factor (which is typically 20:1), eg in determining the applicable amount for PCLS purposes in association with a scheme pension from a DB arrangement, so perhaps this is what needs to be done.?