'Political division over LTA leaves pension tax rules in a complete mess'

The pensions industry is still reeling from the shock Spring Budget announcement that the lifetime allowance will be completely abolished from April 2024.

We now have to understand how the rules are changing in this tax year, but also keep one eye on the future and what the change could look like next year. Understanding this will be critical to establishing what this means for clients who are near or over the lifetime allowance and who plan to take benefits soon.

However, this isn’t an easy task. And it’s complicated further by two important points.

First, although we know how the rules are changing this year, we don’t know what the changes will be next year.

From 6 April 2023, there will be no lifetime allowance tax charges. However, scheme administrators still have to carry out benefit crystallisation events and measure the lifetime allowance used. And this means continuing to ask clients for previous usage and details of any protection held, however nonsensical that may seem.

We also know any excess over the lifetime allowance taken as a lump sum will not face a lifetime allowance tax charge but will be subject to Income Tax. And finally, we know those with a protected lifetime allowance get to keep any PCLS protection and can even re-start contributions if they have enhanced or fixed protection.

But we don’t yet know what the April 2024 changes look like. HMRC has told us there will be a maximum PCLS of £268,275 and the lifetime allowance will be abolished. This could be achieved simply by ‘rubbing out’ any mention of the lifetime allowance in the legislation and adding in checks on PCLS taken. Or HMRC could roll up its sleeves and completely dismantle the whole framework, possibly disconnecting the need to secure income at the same time as taking tax-free cash.

Our second challenge is the waters have been further muddied by the Labour party’s staunch reply that they will reverse the removal of the lifetime allowance. Until we see the next stage of draft legislation it will be very hard to judge whether Labour’s intentions are possible in practice. If we are talking about a wholesale legislative change before the next election, Labour will find it very hard to put it all back together. Instead, it may decide to make other changes, such as lowering annual allowance, cutting the tax-free cash limit, or looking at charges on death benefits.

In the meantime, financial advisers need to work with their clients who have amassed pension funds above the lifetime allowance and decide a course of action. My instinct is it’s too early to make any firm plans. We simply don’t know the detail at this stage. If Labour does get elected, and reinstates the lifetime allowance, it may introduce another level of protection for those people who have happily busted the lifetime allowance since April 2023. But there is an outside chance it may not.

The end conclusion is this is no basis for planning long-term savings. No doubt some people will make poor decisions due to lack of knowledge and crystallise early in an ill-judged attempt to escape charges. But if the Treasury does decide to re-write the pension rules completely then holding off crystallising may be the better decision, especially if in the future members can choose which pension scheme they want to take their tax-free cash from.

This is nothing short of a complete mess. The rules are so much up in the air it can only severely damage people’s confidence in pensions (and politics). Now is the time for both HMRC and the Labour party to fully engage with our industry and throw some light on their future plans.