We take a look here at the basics of the draft legislation, which provides for the introduction of two new lump sum allowances. A key concern within the pensions industry is that the Government has yet to publish any transitional provisions, raising the risk of unintended consequences for schemes which have not had a chance to update their rules by the time the changes take effect.
In July the Government published draft legislation dealing with the abolition of the lifetime allowance (LTA) with effect from 6 April 2024. The draft legislation provides for the introduction of two new lump sum allowances which will apply to an individual. The new allowances are the lump sum and death benefit allowance of £1,073,100 (the same as the LTA immediately before its abolition) and the lump sum allowance of £268,275 (25% of the LTA immediately before its abolition).
The individual's lump sum allowance is used when the individual takes tax free cash in the form of a pension commencement lump sum, uncrystallised funds pension lump sum (UFPLS), trivial commutation lump sum or winding-up lump sum (as those terms are defined in the legislation). The individual's lump sum and death benefit allowance is used when the individual takes tax free cash in the form of an authorised lump sum and also when a person receives tax free cash in the form of an authorised lump sum death benefit in respect of the individual. Where part of a lump sum is taxable and part isn't, only the tax free element counts towards the relevant lump sum allowance. To the extent that a lump sum is taxable, it will normally be taxed at the recipient's marginal rate of income tax.
A pension commencement lump sum equating to 25% of the value of the benefits being taken can generally be taken tax free provided the individual has sufficient headroom available under both types of lump sum allowance. 25% of an UFPLS will also be tax free provided the individual has sufficient lump sum allowance headroom.
Lump sum death benefits paid within 2 years in respect of a deceased member aged under 75 will generally still be tax free provided there is sufficient headroom under the deceased individual's lump sum and death benefit allowance. Any excess will generally be taxed as income in the hands of the recipient.
Benefits taken in pension form rather than as lump sums will be taxed as income.
The draft legislation contains extensive provisions dealing with individuals who currently benefit from the various statutory protections in relation to the LTA. "Primary protection" will cease to exist, but will be replaced with a new set of protections. For individuals with enhanced protection, their "applicable amount" for a pension commencement lump sum is the amount that could have been paid on 6 April 2023. The deadline for applying for fixed/individual protection 2016 will be 5 April 2025.
The Government has yet to publish transitional provisions to deal with the situation where one or more lump sums have been paid in respect of an individual before 6 April 2024, but at least one further lump sum is paid on or after that date.
The legislation is currently still in draft and the transitional provisions have yet to be published at all. There have been calls from the pensions industry for transitional provisions to address the fact that most schemes are unlikely to be able to update their rules before the changes take effect. However, it is not yet known what approach the Government will take to this issue.
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