Grading HMRC on abolishing the LTA

The Government recently confirmed its intention to maintain the one-word Ofsted grades for schools, despite a report from the cross-party Education Select Committee calling for an end to the grossly simplified judgements.

If the pension industry was to grade HMRC’s work in relation to the lifetime allowance on the same basis, I could only see one possible report score – “inadequate”.

But, as I suspect could often be the case with Ofsted grades, this judgement is grossly simplified and doesn’t necessarily reflect the effort and intent going on behind the scenes.

I don’t know how much notice HMRC had of the Chancellor’s shock announcement of the removal of the lifetime allowance, but I suspect the answer is not much (and even then, likely only a handful of the people would have been in the know). The timescale for these huge changes was dictated by politicians and HMRC had to get on with it.

I do think HMRC would rate at least a “good” for effort. They set up working groups and consulted with the industry where they could. They have given frequent updates, even when some of the information wasn’t quite right. However, as the industry spoke in unison that the timescales were too tight, their hands were tied. It was also apparent that many working on the project were not familiar with the intricacies of pension legislation that keep us pension techies in a job.

Many mistakes have been made, and a month into the tax year we still have legislation that doesn’t work in places. It’s not all doom and gloom though.

For clients taking benefits for the first time, the new regime is simpler. Tax-free cash is effectively as before with no lifetime allowance to worry about.

Then there’s the clear benefit for some who took less than 25% PCLS previously, or accessed benefits when the lifetime allowance was below £1,073,100, who could now have some bonus tax-free cash they were never expecting.

The bits of legislation that still aren’t sorted aren’t in the areas that impact the masses. Rather they are in the areas that mostly impact those with larger funds, with non-standard arrangements. So more likely advised clients.

HMRC’s newsletter of 4 April confirmed some changes that will be made in upcoming regulations. The first relates to lump sum death benefits paid from funds that crystallised prior to 6 April 2024. The policy intent is that these are not tested in the new regime – but the legislation does not yet reflect this. Where death benefits are paid as income, this is all irrelevant, and if there is plenty of allowance left then there isn’t an issue either.

Most of the outstanding areas largely relate to protection. Neither scheme-specific lump sums, nor protected lump sums in connection with primary or enhanced protection, are dealt with properly in the existing rules. There is also an issue in that if a client with enhanced protection transfers to a new arrangement, then they lose their enhanced lump sum and death benefit allowance.

All of these will be sorted in due course, and HMRC’s recommendation is for clients who are impacted is to simply wait it out until they catch up.

HMRC has also struggled with the fact that not everyone takes their PCLS by age 75. Under the old rules we were allowed to ignore the age 75 test when calculating PCLS available after this age, but the new legislation has no such provision. This means to get the correct lump sum allowance clients must apply for a transitional certificate. Although HMRC has said they would look at this, there is no confirmation that this will be dealt with in the next set of regulations.

If you have clients that have taken PCLS after age 75 under the old rules, and still have further uncrystallised funds, there’s another kick though. Applying for the certificate won’t put them in the correct position either, as it won’t take into account the post-75 PCLS as it wasn’t a BCE. This glitch is due to be fixed in the next regulations though and HMRC has recommended schemes include the post-75 PCLS now to make sure certificates aren’t invalidated later.

Finally, we have issues with overseas transfers to QROPS. The rules on this were changed in the first set of regulations, are due to be changed again in the second set, and there are still unresolved issues that haven’t been addressed.

With an election looming there’s lots of debate as to how long these rules will last. If we do have further changes, let’s hope HMRC learns from some of the mistakes, and any new government gives them time for a proper consultation rather than a mountain of homework the night before the deadline.