By James Jones-Tinsley, Self-Invested Pensions Technical Specialist at Barnett Waddingham
This paper included a few important clarifications, which we had been waiting for since July 2023 when the government released its first draft of pension-related clauses for this year’s Finance Bill, accompanied by another policy paper.
For example, we now know that:
The planned abolition of the Lifetime Allowance (LTA) will still have effect from 6 April 2024.
Income withdrawals taken by beneficiaries where the member died before age 75 will continue to not be subject to income tax.
Those who have fully-used their LTA prior to 6 April 2024 will not have access to the new lump sum allowances taking effect from that date – even where their LTA was used up purely by taking (taxable) income and no tax-free cash.
The abolition of the LTA was first announced – admittedly to great surprise – in the Spring Budget 2023.
The underlying objective of the Chancellor’s announcement was to support, “…the government’s efforts to encourage inactive individuals to return to work, in particular those aged 50 and above”, while arguing that “…a strong labour market is critical to economic growth in the UK”.
The Chancellor was also keen to reduce the number of individuals leaving the workforce voluntarily, especially medical practitioners, purely for pension tax reasons.
Therefore, the Finance (No.2) Act 2023 removed the LTA excess tax charge from 6 April 2023, to provide an immediate incentive to stay in work, with the promise of the complete abolition of the LTA from 6 April 2024 as an additional ‘carrot’.
Two principal themes subsequently emerging from the work of HMRC’s LTA Working Group, and contained in the two policy papers, are:
Firstly, there is to be a clear division between the taxation of pension income, and the taxation of lump sums and lump sum death benefits. Pension income will be taxed at the recipient’s marginal rate of income tax, while lump sums will be tested against two new thresholds and will be payable tax-free, if the amounts involved do not exceed these thresholds.
Secondly, this means that, although we are losing one allowance from next April, it is being replaced with two new allowances; the monetary amounts of which might seem familiar! Tax-free cash from a pension fund will be tested against the Lump Sum Allowance (LSA), which is set at the gloriously unrounded amount of £268,275 (currently, 25% of the LTA), while the Lump Sum and Death Benefit Allowance (LSDBA) will test both tax-free cash sums and pension death benefit lump sums, and will be set at £1,073,100; another unrounded figure that, coincidentally, is the same as the current LTA!
It is worth noting here that those with existing types of pension protection, (for example, Enhanced Protection or Fixed Protection), are likely to have a higher LSA and LSDBA than the amounts shown above – if ownership of those protections can be evidenced. It’s important, therefore, that clients with protections don’t throw away their certificates or reference numbers, once the LTA is abolished. Arguably, they will be even more valuable in ‘the new world’.
In summary, therefore, we are losing one allowance, only to have it replaced with two new ones of equivalent value.
Plus ça change!
The story doesn't end with Autumn Statement documents
The Finance Bill clauses issued in July included a number of ‘gaps’, which needed to be filled in order to complete the picture of what the new pensions world will look like from next April.
And, at the time of writing, we are only four months away from the start of the new tax year. It was therefore imperative that the Finance Bill 2023-24 was introduced into Parliament as quickly as possible after the Autumn Statement.
Thankfully, the bill received its first reading on 27 November. Somewhat less thankfully is the amount of the bill that is taken up with the changes necessary to abolish the LTA from existing legislation. This consists of over 100 pages of heavily cross-referenced primary legislation that does not make for an easy read, (although might act as a cure for insomnia).
It’s therefore going to take some time for the bill to make its journey through Parliament, before receiving royal assent and becoming an act. The story doesn’t necessarily end there; Statutory instruments (a type of secondary legislation) may also be required to provide additional clarification for parts of the primary legislation.
We have been here before. Pensions 'A-Day' was originally meant to happen on 6 April 2004. It ended up happening on 6 April 2006. Even then, numerous statutory instruments were completed months after A-Day occurred and were then backdated to 6 April 2006.
For pension providers and financial advisers, the task of changing systems and processes and explaining all the changes to clients is, to put it mildly, somewhat daunting. And while the bill remains a bill, it is subject to change at any point up to becoming an act, which makes it difficult to explain the changes with absolute certainty to clients who, understandably, want to know how and when will be best for them to access their pension fund.
Throw in the curveball of a general election – and what may then happen to the LTA afterwards – it’s undoubtedly going to be an ‘interesting’ period of time for the pensions industry.
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