We’re now in a new world of pension tax and, for the first time in nearly 20 years, there is no need to check benefits taken against the lifetime allowance (LTA).
This a welcome simplification, especially for those who haven’t taken any benefits.
However, it was always going to be a challenge to deliver a change of this magnitude in the time available. And the government was unwilling to consider any delay to implementation with a general election looming.
Unfortunately, those fears have been realised, with HM Revenue & Customs issuing a newsletter update on 4 April, within which it asks pension schemes to advise some clients to delay taking benefits or transferring until it can fix incorrect legislation.
Making such a major intervention at such a late stage demonstrates how poorly these changes have been implemented. And it puts schemes, advisers and, particularly, clients in a very difficult position.
HMRC suggests delaying taking action for any case that involves the following:
- Scheme specific tax-free cash protection
- Transfer of cases with enhanced protection
- Enhanced protection and primary protection where there are protected lump sum rights of more than £375,000
- Payment of lump sum death benefits in respect of funds that crystallised before 6 April 2024
- Transfer from drawdown to a qualifying recognised overseas pension scheme (QROPS)
- Transfer to a QROPS which involves pre-April 2006 benefits.
We don’t yet have a timescale for when the legislation will be fixed and a green light given to these cases. To draft the correcting regulations and get them through parliament may take two or three months. People can, if they choose, take benefits under the current legislation rather than waiting, although that could have negative consequences and they may end up paying more tax.
This means advisers and clients face some difficult decisions
Lump sum death benefits paid from funds that were crystallised before 6 April 2024 should be entirely tax-free if the member died before age 75. However, the legislation is incorrect and currently these would be measured against the member’s remaining lump sum and death benefit allowance (LSDBA). The government will bring forward legislation to resolve this issue and people could choose to wait until this is done.
However, if the amounts involved won’t trouble the LSDBA there may be no great harm in taking benefits now under the current legislation. Or, rather than paying as a lump sum, pass money through beneficiary drawdown if that is possible. These may be tricky decisions for beneficiaries to make, especially during emotionally difficult times. Advice will be needed.
Those with enhanced or primary protection who have lump sum rights above £375,000 have a choice. Take tax-free cash up to £375,000 now, in which case the member may forgo their protected entitlement, or delay payment of their cash so they can receive their full entitlement once legislation is corrected.
That may well depend on how much the protected tax-free lump sum is and if there is a particular need to take funds now.
Individuals with scheme specific tax-free lump sum protection (a right to take more than 25% tax-free cash from back in April 2006) are also affected. The formula for revaluing their entitlement and adding 25% of the pot built up since 2006 is wrong. These people may want to delay taking benefits until the legislation is corrected.
Some transfers to QROPS will need to be deferred, where the transfer is from a drawdown pot or contains any pre-2006 benefits. These should be fairly rare.
While these obstacles only affect a minority of individuals, it could make a big difference to those affected. Some may be reaching their intended retirement age or have made plans to take benefits. HMRC suggesting, at this very late stage, that action should be delayed is not in any way ideal. Especially given some people may have made plans or given commitments based on the tax-free cash and/or income they were due to receive.
The wider point is it demonstrates the need for longer-term thinking around pensions and long-term savings from government and regulators. Constant tinkering and rushed changes have a negative impact on confidence, and further erodes trust at a time when people need to be saving more for later life.
Setting up an independent long-term savings commission to depoliticise and develop proposals for pension and savings policy would hopefully bring much needed consistency and stability, and deliver greater levels of trust and engagement.