Questions on the Lifetime Allowance changes

Not surprisingly, Aries is receiving a number of queries on the Lifetime Allowance (LTA) changes that were announced in this year’s Spring Budget.

One query concerned a member who has already crystallised benefits to 100% of their LTA but who also has some uncrystallised funds remaining. The question concerned whether, given the changes that have been announced, the member will be able to take any of their uncrystallised benefits as a tax-free Pension Commencement Lump Sum (PCLS) going forward.

Whilst many of the changes that were announced are still a work in progress, I was able to provide some clarification for our enquirer.

Firstly, for the 2023/24 tax year, the only significant change that is relevant here is the removal of the LTA charge and the replacement of the previous 55% LTA charge with a charge to income tax at the recipient’s marginal rate. Importantly, for the 2023/24 tax year, the LTA remains in force.

As the member in question has already used up 100% of their LTA then, in the 2023/24 tax year, they could (subject to the Scheme Rules permitting) take their remaining uncrystallised benefits, or part of their remaining benefits, as a Lifetime Allowance excess lump sum, with a charge to income tax at the member’s marginal rate applying to the entire lump sum.?

For 2024/25 onwards, as the LTA will no longer exist, the draft legislation removes the possibility of the payment of a Lifetime Allowance excess lump sum.

As currently drafted, the new legislation will impose two new limits on a member’s tax-free benefits. One of these is known as the “lump sum allowance” and this new allowance is likely to be the one most relevant to this query as it limits the amount of certain tax-free lump sums (specifically PCLSs, uncrystallised funds pension lump sums, trivial commutation lump sums and winding-up lump sums – collectively known as “relevant lump sums”) that a member can receive.? The limit for this new lump sum allowance will be set at ￡268,275 (which just happens to be 25% of the standard LTA for the 2023/24 tax year).

When assessing benefits against the new lump sum allowance, it will be necessary to deduct from the ￡268,275 figure “the previously used amount”, which is “the aggregate of the non-taxable amounts in relation to each relevant lump sum to which the individual has previously become entitled”.

Taking this at face value and applying it to this case, there would appear to be two possibilities. Either:

• The member has already taken tax free elements of relevant lump sums up to or over ￡268,275 – in which case no tax-free PCLS could be taken on or after 6 April 2024,

or?

• The member has not already taken tax free elements of relevant lump sums up to ￡268,275 – in which case they would be able to take a PCLS of up to the remainder of the ￡268,275 ?allowance (or up to 25% of the value of the benefits being taken if lower).?

Unfortunately, however, this is not the complete picture. The draft legislation currently available is only forward looking, in the sense that it works well for a member who has not crystallised any benefits at all before 6 April 2024. What we do not yet have is any details of how any benefits crystallised before 6 April 2024 will be factored in for the purposes of the new allowances. It seems clear that there will have to be a raft of “transitional provisions” to ensure that pre 6 April 2024 BCEs are taken into account under the new regime, however all the draft legislation says on this so far is ”TBC” (to be confirmed).

These missing transitional provisions really are “the elephant in the room” and there have been pleas to HMRC to release them as soon as possible.

Now, although we do not yet have any details of how pre 6 April 2024 BCEs will be accounted for under the new regime, we do not think that it is HMRC’s intention for the changes to result in a tax-free windfall for members or to open up any scope for significantly greater PCLS entitlements. In our view, it is likely that any member who has already used up 100% of their LTA before 6 April 2024 will not be able to take any tax-free PCLS after the changes take effect.

For completeness we should also mention that, as it stands, the draft legislation says that any PCLS that it taken in excess of the new PCLS limits will be taxable at the recipient’s marginal rate of tax. This, however, does not appear to be the actual policy intention and we anticipate that the draft legislation will be amended to ensure that any PCLS taken that exceeds the relevant limits will (just like now) be treated as an unauthorised payment.

In summary, then, we believe that it is unlikely that the impending changes will allow this member to take any tax free PCLS on or after 6 April 2024.

Aries Insight?provides comprehensive and detailed guidance on the application of the LTA as well as insight into 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.