What can pensions industry expect from the finance bill draft rules?

Both proclamations were unheralded political decisions made without consultation with the pension industry.

In respect of the removal of the lifetime allowance, there is much work to be done in very little time if the promised deadline of April 2024 is to be met.

This article looks at the changes made so far, the draft legislation for 2024-25 and the as-yet still unknowns.

Current rules for 2023-24

The Finance (No.2) Act 2023 has now received royal assent, which means the rules for the current tax year are confirmed.

The LTA remains in place at £1,073,100. However, the LTA charge that arises when the LTA has been exceeded has now been removed.

Where the LTA charge of 25 per cent would previously have applied, this charge no longer arises. This includes designating funds to drawdown, purchasing an annuity, or starting a scheme pension in excess of the LTA – in these examples income tax will apply as usual.

For lump sum payments that would have been subject to the 55 per cent charge, the charge has been removed and instead the excess lump sum is subject to income tax on the recipient.

Examples include LTA excess lump sums and lump sum death benefits from uncrystallised funds or defined benefits in excess of the LTA.

There are still many unanswered questions, and we expect more draft legislation to follow.

In respect of death benefit lump sums, the personal representative is responsible for reporting to HMRC that tax is due, and HMRC will collect the income tax due directly from the recipient.

It is important to note that it is only the LTA charge itself that has changed in 2023-24. Benefit crystallisation events still take place, and pension scheme administrators are required to report these events to HMRC as they were previously.

This means the requirement for members to provide information on any previous crystallisation events and details of any protections held also remain. Benefit statements are still issued stating how much of the LTA has been used.

In 2023-24 the maximum pension commencement lump sum remains as 25 per cent of the LTA (that is £268,275) unless protection is held.

Anyone who holds valid enhanced protection, or any of the fixed protections, where they applied for it before March 15 2023, can now make contributions or start benefit accrual (as long as they did not do so before April 6 2023) and they will retain their right to higher PCLS.

Those with enhanced protection with a protected lump sum now have their maximum PCLS capped at the maximum that would have been payable on April 5 2023. This is the same regardless of whether they have made contributions since April 6 2023 or not.

For anyone who has standalone lump sum protection, the tax-free amount is also capped at the amount payable on April 5 2023. Any funds above this level can be paid but will be subject to income tax.