HMRC rushes to implement lifetime allowance changes

HM Revenue & Customs (HMRC) published its latest guidance on the abolition of the lifetime allowance on 4 April, just two days before the change was due to come into effect.

The abolition was announced by chancellor Jeremy Hunt in last year’s Budget, but the complex changes required to enact the change have meant that, in many cases, tax authorities are not yet ready.

Those receiving lump sum death benefits may face “unintentional” tax bills if these exceed existing limits, despite the government’s policy that these should be tax free.

While the government works on amending legislation, HMRC said legal representatives “may wish to delay requesting the payment”.

In addition, HMRC said some members with enhanced protection “may wish to delay transferring to a new provider” until the government has updated relevant legislation.

HMRC also said individuals with protections that allow them to take lump sums of more than £375,000 should either take out a lump sum below this limit or delay the payment, while the government fixes a paragraph of the 2004 Finance Act that blocks this ability.

Andrew Tully, technical services director at Nucleus Financial, said: “To suggest at such a late stage that people should delay taking benefits or transferring shows how poorly these changes have been implemented.

“We are only a few days away from implementation so some advisers and customers will have made plans and committed to use funds. Now HMRC is effectively delaying payments to customers or stopping them taking certain actions while it fixes incorrect legislation. It’s a bit of a shambles.”

Industry commentators have warned that errors in communications and the late implementation of changes could cause significant issues for pension savers, including unexpected tax charges.

Election impact

There is also speculation about whether the Labour party could reintroduce the allowance if it wins the next election. The opposition said it would do so almost as soon as the abolition was announced last year, with proposed ‘carve-outs’ for senior NHS staff to ensure they were not being forced to retire early.

However, such changes would not be simple. In a paper published in November, LCP warned that reinstating the allowance would require careful consideration of the impact on those that had made decisions and saved additional amounts during the period the allowance was abolished.

The consultancy group also warned that as many as 250,000 could be affected if Labour reinstates the limits, and argued that such an action “may actually generate remarkably little revenue”.

Further reading

Abolition of the lifetime allowance: latest update – by Karla Bradstock, Trafalgar House (1 March 2024)

Lifetime allowance: Confusion and a ‘cruel twist’ follow its abolition (27 September 2023)