Changes by HM Revenue and Customs in response to the scrapping of the lifetime allowance could delay pension payments on death to beneficiaries, Quilter has warned.
Last week (March 27), HMRC published its lifetime allowance guidance newsletter following the Spring Budget in which the LTA was abolished.
According to the newsletter, the changes announced in the Budget mean lump sum payments from pensions on death that would have been subject to a lifetime allowance excess charge will instead be liable for income tax at the recipient’s marginal rate from April 6, 2023.
The LTA itself will be abolished entirely from April 2024.
But according to Quilter, the changes HMRC is making places the onus on the beneficiaries or solicitors to determine and relay the apportionment of a tax charge to the pension provider, and then the provider is required to deduct the tax from the excess above the lifetime allowance prior to making the payment.
This could cause complications and delay pension death benefit payments, said Jon Greer, head of retirement planning at Quilter.
This change in process from HMRC may appear innocuous, but it is highly likely to cause delaysJon Greer, QuilterFor uncrystallised funds, lump sum death benefit and defined benefits lump sum death benefit a scheme’s processes for dealing with lump sum payments on death will change.
Previously, a pension provider would pay-out pension death benefits without accounting for the lifetime allowance tax charge.
The legal personal representative which could, for example, be the beneficiary or a solicitor, would be responsible for collating information about the payments made to beneficiaries, including any amount above the deceased member’s available lifetime allowance.
This would be disclosed to HMRC generally within the later of 13 months of the member’s death or 30 days of the date they realised that an LTA charge applied.
But from April 6, 2023, providers will need to contact the LPR of the deceased member before paying pension death benefits to find out how much available lifetime allowance the member has.
The provider will need to tell them the type and amount of benefit it intends to pay.
The LPR will then confirm to the provider how much of the payment will be subject to income tax – and where multiple payments are being made to different recipients allocate the liability.
“This change in process from HMRC may appear innocuous, but it is highly likely to cause delays in the time it takes for beneficiaries to receive lump sums payments,” Greer said. “This is because the pension scheme will be required to wait for the legal personal representative to confirm the LTA position before it can release funds.”
Greer added that LPRs are unlikely to have technical pensions knowledge and may need to seek further advice to understand what is required of them at a time when they are often vulnerable.
He said: “They may also be dealing with multiple pension schemes, resulting in a long-winded process before they can confirm any LTA excess to multiple schemes having applied apportionment where multiple beneficiaries exist.
“This may be beyond the capability of some LPRs who will no doubt be seeking help, and all the time that is happening the beneficiaries are waiting for payments.
“And given that not all pension schemes hold remaining funds in cash their value could fluctuate. Consequently, the valuation could change in the time the request is made to the LPR and the point at which they reply, which could be a number of weeks after.
“In that time, it’s possible that funds could increase or decrease in value meaning the tax paid by multiple beneficiaries is subject to a degree of inaccuracy where multiple payments are being made.
“While this process change appears simple, it will not benefit pension beneficiaries who, in some cases, will have to wait significantly longer to receive the money they are owed.”
An HMRC spokesperson said: “We are committed to working closely with pension providers, and others across the industry, to ensure the abolition of the lifetime allowance is implemented effectively.
"This includes regular conversations to resolve concerns that these changes may cause and ensure that the processes being put in place do not disrupt payments to beneficiaries.”
amy.austin@ft.com
