New regime uncertainties remain

The new tax year will bring in sweeping changes to the pension world. Due to the rushed nature of the upheaval surrounding the abolition of the lifetime allowance, we still have some areas of uncertainty as the deadline rapidly draws near.

Although the 100-pages of related legislation now have Royal Assent in the form of the new Finance Act, this does not mean they will not change. At the end of those pages is a “Henry VIII” clause, which means changes can be made by regulations at any point until April 2026.

There are a few areas where HMRC has already told us that changes will be made, as the legislation doesn’t match the policy intent.

In their March newsletter a few such changes were tabled, two of which caught my eye.

Starting with the good news – HMRC is considering making changes that would allow schemes to exclude age 75 tests from the standard transitional calculation when calculating available lump sum allowance. This would mean that those who haven’t taken all their PCLS by their 75th birthday wouldn’t need to apply for a transitional tax-free amount certificate to get the correct allowance.

The second is in relation to overseas transfers.

The overseas transfer allowance (OTA) is set at £1,073,100 unless protection is held. This is separate from the other allowances and in the Finance Act 2024 there is no provision for it to be reduced by benefits taken before the transfer. In theory this meant someone with a (say) £2 million fund could take maximum PCLS here, then transfer £1 million out to a QROPS without penalty and potentially take more PCLS.

The newsletter confirms changes will be made by regulations, so that where members have crystallised under the current regime, their OTA will be reduced by an amount equal to 100% of their LTA usage. So, if all PCLS has been taken, 100% LTA used, then there is no OTA available. This would mean the whole transfer to a QROPS would be subject to the OTA charge at 25%.

The newsletter goes on to say that this will “ensure individuals can make tax-free transfers to QROPS up to the same value as they have expected to benefit under the LTA”. However, this is simply incorrect. If someone had used 100% LTA by taking PCLS and drawdown, and transferred to QROPS under the current rules, then we have rules to prevent double counting on the drawdown fund. So, the amount previously put into drawdown would be deducted from the transfer value, and the old LTA charge of 25% would only have applied to the excess. There is no mention of this in the newsletter.

I do think HMRC have a very tough job with the timescales handed to them by politicians, but the fact that the primary legislation is wrong in many places, and that the “correcting” regulations may need correcting too, just show the perils of rushing things through without proper consultation with the industry.