Lifetime Allowance Changes
In the 2023 Spring Budget the Chancellor announced, among other key pensions changes, the abolition of the Lifetime Allowance. This change won’t take full effect until 6 April 2024 due to the complexity of removing it from legislation and HMRC guidance and although the Lifetime Allowance and Benefit Crystallisation Events (BCEs) framework remains in place for the 2023/24 tax year, the Lifetime Allowance charge was abolished from 6 April 2023.
Lump Sum Benefits
The abolition of the Lifetime Allowance charge means that excess funds (eg, those which exceed the member’s remaining lifetime allowance) for relevant lump sum payments made by registered pension schemes, or by relieved non-UK pension schemes, on or after 6 April 2023 will now be taxed as pension income at the recipient’s marginal rate.
For these purposes, ‘relevant lump sum’ means any of the following:
- a serious ill-health lump sum
- lifetime allowance excess lump sum
- defined benefits lump sum death benefit
- uncrystallised funds lump sum death benefit
These changes ensure that certain payments, which would have previously been subject to the lifetime allowance tax charge of 55%, are not made tax free following the abolition of the lifetime allowance charge.
Lifetime Allowance Test and Tax Liability
The process for testing these lump sum payments against an individual’s lifetime allowance isn’t changing. The member’s remaining lifetime allowance will still be subject to the £1,073,100 limit for the 2023/24 tax year unless they have a higher limit because of some form of lifetime allowance protection.
The recipient of the lump sum will pay marginal rate tax (or emergency tax on a month one basis if the tax code isn’t known) on the excess funds and as this is taxable income, the scheme administrator will issue a P45 to the recipient for PAYE purposes.
The process for uncrystallised lump sum death benefits is slightly different. Where the deceased is under the age of 75 at date of death, and the lump sum is paid within two years, it will still be for the deceased’s Legal Personal Representatives (LPR) to carry out the lifetime allowance test and report any chargeable amount to HMRC, with the recipient of the lump sum death benefit settling the tax liability due directly with HMRC.
The Money Purchase Annual Allowance and Tapered Annual Allowance
None of these taxable lump sums will trigger the Money Purchase Annual Allowance but as they are taxed as pension income, they will impact the calculation for adjusted income and threshold income for the Tapered Annual Allowance, therefore potentially impacting an individual’s annual allowance for the tax year in which the lump sum is paid.