Taxing changes to the Lifetime Allowance – Finance Act 2024 now published

One of the headline pensions announcements in the Spring 2023 Budget was that the lifetime allowance (LTA), which had capped tax-efficient saving in pension schemes since its introduction in 2006, was going to be abolished.

Shortly after the Spring 2023 Budget, the Finance (No 2) Act 2023 was enacted. This removed the LTA charge for the 2023/24 tax year, and paved the way for more fundamental changes to the pensions tax legislation via a further Finance Bill, which has until recently been working its way through Parliament.

The Finance Act 2024 (FA24) has now been published. This makes a number of changes to the pensions tax rules which will take effect from the start of the 2024/25 tax year (i.e. 6 April 2024). We’ve set out 6 of the key changes below:

1. Abolition of the LTA. The LTA framework has now been completely dismantled by the FA24.

2. New tax-free cash allowances. Instead of the LTA, two new allowances have been introduced – an individual’s Lump Sum Allowance (LSA) and an individual’s Lump Sum and Death Benefit Allowance (LSDBA):

• The LSA caps the amount that can be taken tax-free in lifetime in the form of pension commencement lump sum (PCLS) or the tax-free element of an uncrystallised funds pension lump sum (UFPLS).
• The LSDBA caps the amount that can be taken tax-free in life and death combined.

This is broadly intended to replicate the tax-free cash amounts that were typically available under the LTA regime.

For the 2024/25 tax year, the LSA is set at £268,275 (25% of the current LTA) and the LSDBA is £1,073,100 (the current LTA).

3. Pension Commencement Excess Lump Sum (PCELS). Whilst the amount of a tax-free PCLS is capped in accordance with the allowances above, a new authorised lump sum (the PCELS) has been introduced which will permit the payment of further lump sums to an individual that has exhausted their lump sum allowances. A PCELS will be subject to marginal-rate income tax in the hands of the individual receiving it.

4. Overseas Transfer Allowance (OTA). A further new allowance, the OTA, is being introduced to limit tax-free transfers overseas for individuals. The OTA is to be an amount equal to an individual’s LSDBA, so £1,073,100 for the 2024/25 tax year.

5. Reportable events to HMRC. The obligations on scheme administrators to report certain events to HMRC relating to the LTA are being repealed. In their place a new reportable event (no.24) is being introduced, which will require scheme administrators to make a report to HMRC where a lump sum / lump sum death benefit payment is made which exceeds the LSA / LSDBA limits.

6. Providing information to individuals. New information needs to be provided to individuals about the remaining amount of their LSA and LS&DBA where they’re paid a PCLS. These “Relevant Benefit Crystallisation Event (RBCE) statements” replace the previous “BCE statements”.

2 key actions for trustees

There are two key actions that we’d recommend that trustees of occupational pension schemes take now to account for these upcoming tax changes:

1. Liaise with scheme administrators. Trustees will want to get comfort from their administrators that they are abreast of the changes and updating their systems accordingly – e.g. that they will factor in the new lump sum allowances in relation to any retirements taking place after 6 April 2024, they will make the necessary event report to HMRC where a payment is made which exceeds the new lump sum limits, and they will provide the new RBCE statement to members where they’re paid a PCLS.

Trustees currently undertaking a buy-out transaction with an insurer may also want to ask similar questions of the insurer, as the insurer will take over responsibility for paying members’ benefits once the buy-out has concluded.

2. Review scheme rules. With the assistance of their scheme lawyers, trustees should review their scheme rules in light of the tax changes. A Deed of Amendment may be needed / useful in the following circumstances:

a) If trustees want the facility to pay a PCELS (and they don’t already have a facility to pay a Lifetime Allowance Excess Lump Sum (LTAELS) – see paragraph below), the scheme rules should be updated so that they have this power.

b) Where the scheme rules refer to the LTA or the LTAELS, trustees may want to update their rules to delete references to soon-to-be defunct terminology. This isn’t something they have to do immediately, as there is an overriding amendment power in Schedule 9 to the FA24 which deems any references in scheme rules to the LTAELS as referring to the new PCELS. However, the overriding amendment ceases to have effect at the end of the tax year 2028/29, so it may be worth amending the scheme rules now simply to get this done and so it doesn’t get forgotten about in five years’ time.

c) Some schemes still open to accrual limit benefits that can be accrued by reference to the LTA. Thankfully, Schedule 9 to the FA2024 also caters for this by stating that the LTA changes don’t affect the interpretation of these limiting rules. However, as with the point above, this overriding provision ceases to have effect at the end of the tax year 2028/29, so again schemes in this position may want to update their rules now so this doesn’t get lost (assuming they still want to cap benefits by reference to the new allowances, of course).

If you have any questions about the tax changes, or would like a review of your scheme rules, Doyle Clayton’s specialist pensions team would be happy to assist you.