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The lifetime allowance (LTA) disappears from the pensions tax
regime within a matter of days (on 6 April 2024). The annual
allowance control remains and new controls on amounts that can be
withdrawn as tax-free lump sums then come into force (the Lump Sum
Allowance and Lump Sum and Death Benefit Allowance).
HMRC has published Pension Schemes Newsletter 157, the seventh in
a series of newsletters since the legislation implementing
the new regime (Finance Act 2024) was introduced into
Parliament. These seek to offer clarity where there is uncertainty
and to explain intentions where the provisions of the Finance Act
do not align with the policy intent. In addition, one set of
amending regulations, which comes into force on 6 April
has already been laid and the Newsletter gives notice that further
amending regulations will also be laid (these will not be laid by 6
April 2024, but are expected to have effect from that same
date).
Like its predecessors, Newsletter 157 includes frequently asked
questions (FAQs). A consolidated set (numbering 105) will also be
available but has yet to be published publicly.
WTW comment
This latest newsletter contains some helpful clarifications, but
still leaves open certain issues.
An important feature of the new regime is the pension
commencement excess lump sum (PCELS). This will allow a taxable
lump sum to be paid in broadly similar circumstances to the
lifetime allowance excess lump sum under the LTA regime. However,
there are differences, one of which is that it will be possible to
pay a PCELS only where the amount could not be paid as a different
form of authorised lump sum. Within defined contribution (DC)
arrangements, one such alternative form will be an uncrystallised
funds pension lump sum (UFPLS) which, under the new regime, will no
longer need to be supported by any allowance (although there will
be no 25% tax-free element unless supported by unused LSA and
LSDBA). DC schemes that make provision for such payments will not
therefore be able to offer a PCELS. This might seem reasonable, as
an UFPLS and PCELS can deliver the same amount of taxable lump sum,
but payment of an UFPLS triggers the money purchase annual
allowance, whereas a PCELS does not.
There is a significant uncertainty relating to this, though. DC
scheme rules do not have to make provision for an UFPLS to be paid,
but there is a statutory override permitting these. This could mean
that no DC scheme can pay a PCELS as it could always pay an UFPLS.
HMRC’s Newsletter 157 (question 3) says that both DC and
defined benefit schemes can offer a PCELS, which suggests that it
doesn’t believe that the mere existence of the statutory
override precludes payment of a PCELS from a DC scheme. However,
this point is not addressed explicitly and, the question having
been raised with HMRC (by us and others), it is disappointing that
HMRC has not put the matter beyond doubt.
The Newsletter also covers many other areas such as death
benefits, the Transitional Tax-Free Amount Certificate, reporting
requirements, and protections and enhancements. In addition, it
identifies areas where HMRC intends to make further legislative
change. The Explanatory Memorandum to the first set of
amending regulations stated that a further statutory instrument
would be made on 18 April 2024, but the only timing reference in
the Newsletter to further legislative amendments is to “later
this year”. There are a considerable number of changes noted
(and we suspect that there are already others to be added to these)
and, although some of these will affect reporting (where there
might be less urgency), others will impact calculations from 6
April, for example for some deaths, divorces or members with
protections. HMRC will be very keen to deliver these regulations.
We would be surprised if the next (if not final) set of regulations
was delayed beyond April.
Pension schemes and their administrators will be doing
everything in their power to ensure a smooth transition to the new
regime. However, that’s not easy when, with only a handful of
days until the changeover, some of the requirements have only
recently been clarified and, in other areas, that clarity is still
awaited.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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