Pension points to consider as we wait to emerge from the legislative merry-go-around

While Rishi Sunak’s decision on 22 May to call the General Election may have been known in certain circles prior to the event, most of us were taken by surprise. In pension technical circles, our focus these last few months has been on analysing and integrating the recently-laid pension rules into our organisation’s working practices. Yours no doubt has been on reshaping your client’s financial strategy in retirement.

As you will no doubt be aware, the initial regulations to remove the lifetime allowance (including the April update) are workable for the vast majority of your clients. However, there are still gaps and errors for the more unusual circumstances that need some extra thought from lawmakers.

HMRC was working through updates to the regs with a summer premiere in mind, but the proroguing and dissolving of parliament in the days following the PM’s announcement meant remedial work was placed on hold while the country went to the polls.

As we wait for the new government to settle in, I thought it might be useful to signpost some specific client cases that may require a bit more thought, particularly if pension benefits are required now or soon. This won’t cover all the known ‘wrinkles’ (the uncovering of which has proven a pensions Pandora’s box in recent months) but it ought to provide an overview of the main discussion points.

Tax-free cash post-75

The group arguably at most risk is the over 75s where there are a couple of related issues. Clients with uncrystallised funds looking to take a lump sum will need to consider how their previous lifetime allowance usage translates into the new regime. They will have the choice between using the standard transitional calculation (STC) or applying for a transitional tax-free amount certificate (TTFAC) but neither avenue is without a potential pitfall.

For those who opt for the STC, the formula includes LTA used by uncrystallised funds tested at age 75 under the previous regime, despite no lump sum being paid at this point. This may result in a much a lower lump sum allowance than they ought to have.

This is really an oversight in the STC. Applying for a TTFAC should get round this and give them the right lump sum allowance. In one sense it does but there are risks attached, particularly for those who have taken a PCLS after turning 75 but before 6 April 2024 and are considering another lump sum before the rules are updated.

This cohort will need to consider very carefully whether the certificate is for them. On the one hand, they will receive a higher lump sum allowance as the lump sum crystallised post 75 is ignored. However, HMRC is expected to tighten this area soon along with some other general tweaks where multiple schemes are involved, and it has advised scheme administrators to include these lump sums in certificates.

Meanwhile, any certificates issued under the current ‘incorrect’ legislation could be invalidated retrospectively and that would spell bad news for those who have taken a lump sum or are about to as they won’t be able to re-apply. The problem may even take the shape of an unauthorised payment and the associated tax charges.

Transitional protection with protected lump sums

Moving swiftly on to those who hold primary or enhanced protection with a protected lump sum. Having the foresight to save more into their pension than the lifetime allowance, and being aware of the impact of tax on long-saved funds should not have left them with the predicament they face.

The issue concerns the calculation of permitted maximums which currently restricts holders to a tax-free lump sum of £375,000. Whilst this won’t be an issue for some, it will potentially be extremely costly for others with large savings that have protected lump sum entitlement attached which would ordinarily give rise to much larger tax-free cash payments – payments not permitted under the rules as they are.

That’s not all. Those with enhanced protection are also temporarily hamstrung should they wish to transfer for similar reasons, with protected allowances operating on a per arrangement basis. Expect new rules to resolve this.

So, what to do?

I’ve mentioned three scenarios here. There are other issues with protected lump sums, whether part of enhanced or primary protection or scheme-specific lump sum protection. There are also challenges around transfers with enhanced protection.

The prudent response, as recommended by HMRC if your client is in this boat, is to hold off until the rules are amended with exceptions only for cases of extreme hardship.

It’s to be expected that some topics remain open to interpretation, and anecdotally it seems different providers are taking different approaches. If your client does take benefits before the legislation is corrected, make sure you understand the approach their provider is taking.

HMRC has, to their credit, been responsive as we work to transition to the post-2024 pension benefits regime for all our clients. The current regulations may not be water-tight in all areas just yet, but they will improve with each amendment. We will get there.