To crystallise or not to crystallise – that is the question I am frequently asked by advisers debating the appropriate course of action for clients holding funds over the lifetime allowance.
The euphoria some may have felt when Jeremy Hunt made his shock announcement of the scrapping of the lifetime allowance back on March 15 was swiftly replaced by uncertainty as Labour’s instant response was that they would bring it back.
This has led to questions over what is the best thing to do for clients who have exceeded the lifetime allowance. The most common situation I have been asked about is for those who have already taken the maximum pension commencement lump sum and crystallised up to the lifetime allowance.
Should they now crystallise the excess while there is no lifetime allowance charge? Would this mean that if Labour got in and reintroduced the lifetime allowance these funds would be “safe” from being retested? Or if the age-75 test came back would it only be the growth since crystallisation that would be tested, not the whole amount?
I do not have the answer to these questions – and I do not think anybody does.
The lifetime allowance still exists in the current tax year. It is only the lifetime allowance charge that has been removed. We know what that looks like, as we have legislation – albeit only in the form of a bill that is yet to receive royal assent.
We do not yet know what the removal of the lifetime allowance will look like. HM Revenue & Customs has set up a working group to go through the detail of the full abolition of the lifetime allowance and the impact on legislation and processes. As it has not yet been finalised how the rules will be removed, I am confident no one has worked out what any potential reinstatement would look like.
I certainly do not think Labour has a cohesive plan as to how they would implement a reintroduction, what level it would be at, and what would happen in respect of previously crystallised funds.
What we do know though is that when the lifetime allowance was first introduced back in 2006, and at every reduction since, there have always been protections – and those have been brought in under both Labour and Conservative governments, plus the coalition.
HMRC has said there will be a short consultation on the draft legislation that removes the lifetime allowance. Unlike the lifetime allowance charge removal brought in at a couple of weeks’ notice, we would expect this to be out by the autumn, so hopefully we should know what 2024-25 looks like at least a few months in advance.
For those with lifetime allowance left, could they potentially be better off crystallising when there is no test at all in 2024-25, rather than in 2023-24 when the lifetime allowance is still used up (albeit with no tax charge)?
Once we have the next set of draft legislation, we may be in a better position to see how hard it would be to put the genie back in the bottle.
Importantly, we are not expecting an election until late 2024/early 2025, so if you and your client decide they want to crystallise ahead of any potential Labour government, there would still be time to do it in 2024-25 before any new regime could come in to make big changes.
Lisa Webster is senior technical consultant at AJ Bell
