Lifetime allowance limbo

The removal of the lifetime allowance has been far from a smooth process. The simplistic statement from Jeremy Hunt in the Budget of March 2023, that the lifetime allowance would be abolished entirely from 6 April 2024 was followed by HMRC frantically scrabbling around to get everything in place for the deadline.

Although there was certainly a lot of effort, with working groups set up and hurried consultations, these attempts were not entirely successful. It quickly became apparent that those at HMRC dealing with the changes did not have a complete understanding of the intricacies of the UK pension system, nor the implications of the changes they were making. Consultations were only on some parts, and key points fed back to them by industry were not adequately dealt with.

All of this means we had a new Finance Act passed in February which contains several errors, meaning legislation does not meet policy intent. As the Treasury was aware of this risk, there is a provision in the legislation that allows changes to be made by regulations (rather than primary legislation), which will be retrospective to 6 April 2024. However, where these changes put taxpayers in a worse position, they must still be approved by parliament.

On 4 April this year, HMRC confirmed some areas where changes will be made in the next set of regulations to put right incorrect tax positions, and that they would be made “shortly”. Except now we are in limbo.

No regulations can be made until we have a sitting parliament – which with the general election will be July at earliest. Given the time needed for regulations to pass, and the impending summer recess, we could easily be into September. And that’s assuming the new government waves them through before starting to re-write the rules all over again.

Which clients could be impacted?

The good news is that most clients won’t be impacted. It is the nuanced cases, largely involving protection when issues arise.

Those who could potentially be impacted include:

• Clients with protected lump sums.
• Clients transferring with enhanced protection.
• Clients in drawdown transferring overseas.
• Clients who have taken a lump sum after their 75th birthday.
• Beneficiaries who want to take a lump sum death benefit from funds crystallised before 6 April 2024.

What can these clients do?

In certain scenarios, HMRC’s message is that pension members who are impacted should delay taking benefits or transferring. That message was issued on 4 April in their newsletter confirming the changes would be made shortly. It was slightly disappointing that in their latest newsletter of 30 May, there was no update on their position considering the election has been called.

In late April HMRC did state that: “where a member requires a payment which is affected by the further regulations and cannot wait until these are introduced due to financial hardship, you can contact HMRC directly at ltaadministration@hmrc.gov.uk and put ‘LTA further regulations — impacted member’ in the subject line.”

The first port of call for advisers with clients in these scenarios who don’t want to wait to access their pension should be to talk to the provider about the options. Depending on individual circumstances it may still be possible to make payments.

If not, even though the average advised client may not meet the usual definition of “financial hardship”, if there are specific reasons for wanting to access the pension now rather than waiting, it could be worth putting the question to HMRC.