What happens when legislation differs from guidance

This time last year, the Chancellor stood up and announced his intention to abolish the pensions lifetime allowance.

Such an easy thing to say. But the rule changes needed to make this a reality have been complex – especially for those who are in transition between the two regimes and have taken benefits before April and intend to take benefits afterwards as well.

As we get to grips with the new Finance Act 2024, we are encountering more and more occasions where the legislation doesn’t exactly agree with the spirit of what HMRC is trying to achieve or the guidance it delivers.

Take the transitional tax-free amount certificate. For those who hadn’t taken their full tax-free cash amount of 25% when they crystallised before 6 April 2024, this gives them the ability to opt for a different transitional calculation and so boost their lump sum allowance. So far, so good. But those who did take their full 25% tax-free cash at a time when the lifetime allowance was less than £1,073,100 will find applying for the certificate can boost their lump sum allowance. Perhaps, it could be argued, unfairly.

So, can these people apply for a certificate? There is nothing stopping them in the legislation – that doesn’t include any condition that the member had to have taken less than 25% of the crystallisation as tax-free cash. But in guidance HMRC has been firm that those who have already used up their full 25% tax-free cash shouldn’t expect higher allowances. Ultimately, though, legislation tops guidance. And if people apply in these circumstances there is nothing legislatively a scheme can do to refuse them.

A similar situation is found with transfer regulations. When schemes are arranging transfers out, if the receiving scheme isn’t to a public sector scheme or mastertrust, they have to check whether the transfer raises any amber or red flags. An amber flag could be raised if the receiving scheme includes overseas assets. As that covers most schemes, it’s no surprise that some ceding pension schemes have stuck their heels in and consistently raise an amber flag on these transfers, sending the member to a safeguarding interview with MoneyHelper.

Whilst this approach is frustrating, the bottom line is the regulations don’t match what the DWP and Pensions Regulator intended and have described in their guidance.

Thankfully, the DWP has signalled they will change the transfer regulations so they match their intention and their guidance. Although the transfer regulations have undoubtedly slowed the transfer process, it hasn’t ground to a complete stop. But this is partly because not raising an amber flag for a simple transfer to a SIPP is acting in the best intentions of the consumer and not introducing an unnecessary delay.

Drafting a whole new tax regime to replace the lifetime allowance – that essentially replicates what was already there without mentioning the words ‘lifetime allowance’ – couldn’t have been easy for HMRC. But the speed – and haste – with which this has been put into place is undoubtedly a key reason we are seeing more examples of bizarre outcomes for members and their beneficiaries.

Differences between legislation and guidance are frustrating for all concerned. If HMRC intends to now change the legislation to match their guidance, it needs to be very clear with the industry on what it plans to do, and whether any changes are retrospective. Otherwise, it cannot be surprised if schemes follow the legislation and not the guidance.