In what is probably the biggest change since the introduction of ‘pension freedoms’ in 2015, the Government is overhauling the pensions framework by removing the lifetime allowance limit and the lifetime allowance tax charge.  These changes are likely to benefit only a small population of pension savers, but the Government hopes that this will entice skilled workers over 50, and specifically NHS doctors, to remain at work. This means workers can continue to accrue pension benefits without the restrictions of the lifetime allowance limit and the hefty lifetime allowance tax charge that applied where the limit was breached.

When it was announced that the lifetime allowance would be abolished, it wasn’t immediately clear that the lifetime allowance framework would actually remain in place this year. Although the lifetime allowance charge has been removed from 6 April 2023, the lifetime allowance and benefits crystallisation events (BCE) remain in place for the 2023/24 tax year. 

The lifetime allowance has been embedded in the pensions framework since its introduction on 6 April 2006 and, as a result of constant tinkering over the past 12 years, there is a complex labyrinth of lifetime allowance protection rules.  Many people may breathe a sigh of relief over its demise, but the devil is in detail and there are still many questions around how this will operate, not only in this tax year but when it’s abolished in 2024.

The Finance (No.2) Bill, published on 27 March, sets out the draft legislation.  It’s likely to be a few months before the final legislation is published so there is still some uncertainty around some of the immediate changes.  In the meantime, HMRC have issued a newsletter to give pension scheme administrators some guidance on the main changes, including how to deduct tax from any excess funds over an individual’s remaining lifetime allowance, and how the changes impact certain taxable lump sums, pension commencement lumps sums (PCLS) and fund protections.  

So, what do we know so far about the lifetime allowance changes from 6 April 2023?

  • The lifetime allowance framework remains in place.
  • The lifetime allowance charge on excess funds is removed completely.
  • Scheme administrators will continue to request lifetime allowance information from pension scheme members at the relevant BCEs and issue BCE statements confirming how much lifetime allowance the BCE has used.
  • The 55% tax charge on certain taxable lump sums (serious ill-health lump sums, lifetime allowance excess lump sums, uncrystallised funds lump sum death benefits and defined benefits lump sum death benefits) will be removed and, instead, any excess funds deemed to be over the member’s available lifetime allowance will be taxed at the member’s/recipient’s marginal rate of tax or using the emergency tax code on a month 1 basis if the tax code is not known.  Scheme administrators will need to issue a P45 to the recipient of the lump sum payment.
  • PCLS will be capped at £268,275 (25% of the 2022/23 lifetime allowance of £1,073,100) unless the member has some form of lifetime allowance protection or a protected PCLS.
  • Where someone holds, or made a valid application for, Enhanced Protection or any of the Fixed Protections before 15 March 2023, they will be able to accrue new pension benefits, set up new arrangements or transfer without losing their lifetime allowance protection or any protected PCLS they have.
  • In contrast, where someone makes a successful late application for Enhanced Protection (only allowable in limited circumstances) or Fixed Protection 2016 on or after 15 March 2023, they won’t be able to accrue new pension benefits, set up new arrangements or transfer (unless it’s a permitted transfer) without losing the protection.
  • Where someone has Enhanced Protection with registered lump sum protection this is shown as a percentage on their protection certificate.  When they come to take benefits, their available PCLS amount will be calculated based on the lower of the value of their pension funds on 5 April 2023 and the value of their pension funds at the date benefits are taken.  This is to ensure that any pension accrual on or after 6 April 2023 won’t be included in the PCLS calculation.

These are the main changes based on the current draft legislation and HMRC guidance but, as you can see, there are still complexities around how the lifetime allowance will operate this year.  There is likely to be further guidance from HMRC in the coming weeks and we’ll keep you posted on any further updates.