Unintended wording could create further complexity for DB schemes, writes the SPP’s Amit Shanker.

As part of the 2023 Spring Budget speech, the Chancellor Jeremy Hunt stated his intention to:

“…..abolish the lifetime allowance…..” and “..…..simplify our [pensions]  tax system, taking thousands of people out of the complexity.”

This was to be achieved by completely abolishing the Lifetime Allowance (LTA) from legislation from 6 April 2024. 

 

The Chancellor has implemented phase one of his plan by abolishing the ‘flat rate’ LTA charge and increasing the Annual Allowance (AA) limit to £60,000 with effect from 6 April 2023.  This has provided a little simplification because:

  • there should be fewer individuals who exceed the revised AA; and

  • neither industry nor members need to report LTA charges to HMRC for events on or after 6 April 2023.

Whilst the LTA still exists (until at least 6 April 2024), benefits in excess are now charged at the recipient’s marginal rate of tax, rather than a flat rate of either 25% (plus income tax) or 55% depending on whether the member elects take the excess benefit in pension or taxed lump sum form.

What has been proposed?

Phase two of the Chancellor’s plan is underway following the release of draft legislation on 18 July 2023, and a technical consultation to completely remove the LTA from legislation ended on 12 September 2023.  

While a lot of the draft legislation was as expected and contained some simplification, from a member’s point of view things appear to be largely the same, in that:

  • An overall limit of £268,275 (i.e. 25% of the current standard LTA) on the amount of tax-free lump sum that can be taken across all schemes remains. 

  • There is also an overall limit on lump sum death benefits of £1,073,100 (i.e. the current standard LTA).

  • Those able to take a higher lump sum on account of having an LTA protection such as Individual or Fixed Protection will, broadly speaking, still be able to take the same higher lump sum.

  • The ability to cash-out “small” benefits remains - although the draft legislation proposes the tax-free element of cash outs will eat into the new allowance, whereas under the current LTA regime they largely do not. So, an added complexity rather than a simplification.

There were two “big-ticket” items within the proposed draft legislation, which in the eyes of the pension industry are a far cry from simplification:

  • There appears to be some unintended wording that opens the possibility of paying taxed lump sums beyond the usual tax-free allowances for DB schemes, essentially DC freedom and choice flexibilities for DB arrangements.  While HMRC’s newsletter 152 did confirm “it’s not the Government’s intention to significantly expand pension freedoms”, at this time the industry does not know how this core element of the draft regulations will be revised, nor the potential knock-on effects to other areas, so rather than simplifying we could end up with some new complexities.

  • A back-track on a tax break brought in by George Osborne in 2015 for DC savers in respect of the benefits payable if they die before age 75. The draft legislation implies that recipients would pay income tax on payments drawn, with the only way to access these funds tax-free being to pay them out as a lump sum. This means that the funds no longer have the benefit of sitting inside a pension pot with flexibility on drawing. This potentially brings more people into scope than before.

There are also some notable items absent from the draft proposals, such as details of transitional arrangements (i.e. how benefits taken prior to the 6 April 2024 under the existing LTA regime will interact with the new limits), international items (i.e. overseas transfers) and reporting/disclosure requirements. 

Consequently, the pensions industry is missing crucial pieces of a complicated puzzle with uncertainty as to what the final picture will be or what impact the changes will have. 

It is therefore too early to tell if the proposed changes, or those yet to be proposed and consulted upon, will in fact achieve the government’s policy intent of simplifying the pensions tax system, or if by virtue of a deadline of 6 April 2024 being stated in the Chancellor’s speech, this golden opportunity to appropriately fully consult with the pensions industry to achieve simplification will slip through the Government’s hands.

Amit Shanker is chair of the Society of Pension Professionals’ administration committee.

Topics