In 2023 the Chancellor announced that two new allowances: a lump sum allowance and a lump sum and death benefit allowance would replace the lifetime allowance.
This initially seemed to be a relatively straightforward policy measure, but has transpired to have a number of consequential implications requiring significant legislation to enact the measures. The Finance Act provisions alone run to over 100 pages. Furthermore, on 15 March regulations were introduced which make further “consequential, transitional and saving provisions in connection with the abolition of the lifetime allowance charge,” and HMRC have also released further guidance through a series of “lifetime allowance guidance newsletters”, along with a series of FAQs.
The new rules have significant impact for members of plans, pension providers, and employers, which will need to be considered. The new rules also have an impact on globally mobile employees making changes to the member payment charge provisions in respect of lumps sums, introducing an overseas transfer allowance, and overseas transfer charge, and a final deadline to claim non-resident enhancement factors.
As announced in the 2023 Spring Budget, an increase in the annual allowance and the point where it tapers were introduced for 23/24. The changes to the annual allowance were very straightforward. Also announced was the abolition of the lifetime allowance from 6 April 2024, and as an interim measure the lifetime allowance charge was abolished for 23/24.
What's included in these measures?
The details of the changes were initially released in the finance bill in November 2023. The December newsletter summarised the measures being introduced. There are seven key points:
1 Details regarding the pension commencement lump sum (PCLS). This is the tax-free sum and is capped at 25% of the value of the fund or a default of £268,275 whichever is lower. There are enhancement rules where lifetime protections are held.
2 New pension commencement excess lump sum (PCELS). For those who are eligible under a scheme to take an amount as a lump sum in excess of the PCLS this is considered an 'authorised payment'.
3 Those who have various existing protections will benefit from enhancement factors to both the lump sum and the lump sum death benefit.
4 To benefit from lifetime allowance protection and international enhancements the deadline to apply is 5 April 2025.
5 Details regarding the payroll reporting requirements in respect of lump sums
6 Introduction of an overseas transfer allowance (OTA) that can be transferred to a qualifying recognised overseas pension scheme (QROPs) tax free with a tax charge on the excess
7 Changes to the member payment charges in respect of lump sums for those who have claimed tax relief on overseas plans
Significantly, the taxation of death benefits when a member dies before age 75 is potentially subject to significant changes with the introduction of the lump sum death benefit allowance provisions. The rules in this area are complex with transition rules and advice should be sought.
From an international perspective the following changes have been made:
International allowance enhancement
Individuals who have been members of a UK registered plan while overseas and have benefitted from an accrual which has not benefited from UK tax relief may be able to apply for an enhancement. Also, those who make transfers from a recognised overseas pension scheme to a UK registered plan may be eligible. The deadline is 5 April 2025.
International — overseas transfer allowance (OTA) – transfer to QROPs
As a result of removing the lifetime allowance charge potentially any amount could have been transferred to a QROPs. The Finance Act provides for an ‘overseas transfer allowance’. This will be set at the same level as an individual’s lump sum and death benefit allowance. Where an individual’s total transfers from a registered pension scheme (or a relieved non-UK pension scheme) to a QROPs exceed their overseas transfer allowance, the excess will be subject to a 25% overseas transfer charge (OTC). This effectively restores the former position.
International member changes
The abolition of the lifetime allowance may have led to instances where the payment of lump sums and lump sum death benefits to certain members of relevant non-UK pension schemes could be entirely tax-free. As a result, consequential changes have been made to the member charges provisions to introduce new charges where a lump sum or lump sum-death benefit is paid to a relieved or transfer member of a relevant non-UK pension scheme that exceeds their available allowance.
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What happens next?
Employers may need to consider whether adequate communication of the changes have been made to members of the plans and any administrative changes.
Members should consider the effects of the changes, especially where benefits have already commenced, the interaction with the lifetime allowance protections and if applicable whether elections should be made before the window closes on 5 April 2025. As part of the transitional rules Members may need to evidence amounts historically paid tax free.
Pension providers will have to adjust to the new reporting requirements and the provision of statements in relation to benefits taken under the old regime and transitional tax-free certificates.
For more insight and guidance, get in touch with Matthew Wilson.
