Are the new proposed pension tax rules really necessary?

Working in the arena of pensions legislation and regulation can be frustrating.

The pensions industry is often presented with new rules that appear unnecessarily convoluted, but usually we can appreciate the ultimate customer benefit the government or regulator is trying to bring about.

That is not the case with the latest set of proposed changes to the pensions tax rules.

Last month, HMRC published new proposed pension tax rules. This is its attempt to make good on the Chancellor’s promise in the Spring Budget to remove the lifetime allowance from legislation.

What it does is dispense with the lifetime allowance and the set of benefit crystallisation events (BCEs) testing the benefits customers take. But crucially, it replaces them with two brand new limits to test lump sums taken both when accessing the pension and also in death. Income will no longer be tested.

The first – the lump sum allowance – is the total of tax-free lump sums savers can take as PCLS, and the tax-free part of other lump sums, such as uncrystallised funds pension lump sum (UFPLS) and trivial commutation lump sums. The lump sum allowance will be set at £268,275.

But there is another allowance – the lump sum and death benefit allowance. This, importantly, includes the lump sum allowance but also other lump sums received by the member in their lifetime and by their beneficiaries on death. This is to be set at £1,073,100.

As well as those new allowances, there is also a host of legislation outlining transitional arrangements.

We should commend HMRC for meeting its brief. This proposed web of rules creates a new world where people mostly find themselves in the same tax position as before, but gone from the legislation is the concept of a ‘lifetime allowance’.

But is it really necessary?

The Finance (No. 2) Act 2023 had already removed the lifetime allowance charge for the 2023-24 tax year, improving the tax position for a fast-increasing number of people hit by the lifetime allowance. We are now in a good place. When pension savers exceed the lifetime allowance by taking income there are no further tax charges. And no age 75 drawdown test looming over them clouding their pension decisions.

The proposed legislation mainly recreates the same position by merely rearranging the deck chairs. It offers no new customer benefit.

In fact, it does the opposite. These proposed rules would mean new pensions terminology for customers to get to grips with, just adding more complexity and amplifying the belief that pensions are too confusing.

There are other frustrating aspects. Firstly, this set of proposed changes is only half the story. There are important parts missing, including how uncrystallised funds are to be treated on death, how lump sums above 25% should be dealt with, and how the lump sum allowances could be reduced if someone has already used some or all of their lifetime allowance. We don’t yet know when we will see this missing detail.

Secondly, despite not yet having all the facts, these extensive changes need to be in place by April 2024. That leaves very little time for advisers and providers to understand the new rules, make the changes necessary, and for advisers to explain them to their clients.

All in all, this has to be one of the most frustrating piece of pensions legislation yet.