Changes still needed to get lifetime allowance removal right

You may be forgiven for thinking that the removal of the lifetime allowance is old news. However, changes can still be made without amending primary legislation up until 5 April 2026.

We could see another set of regulations before the tax year is out, and on my wish-list would be amendments in respect of the transitional tax-free amount certificates.

These certificates are problematic in a couple of – largely avoidable – ways.

I have two main objections to the current legislation.

The first is the condition that pension scheme members can only apply for the certificate before their first “relevant benefit crystallisation event” (RBCE). Now that we are 18 months into the new regime, we have seen cases where members haven’t realised this (despite warnings).

If they have already taken a lump sum under the new regime, they have blown their shot at having a certificate. This is particularly painful for those who had an age 75 test then took some tax-free cash under the lifetime allowance. In this scenario the age 75 test cannot be ignored under the standard calculation (which would be the case had they not taken a lump sum after their 75th birthday). If substantial uncrystallised rights were held when they turned 75 this can lead to a significant loss in PCLS entitlement. And it all just seems so unnecessary. If PCLS had been paid out up to the maximum available using the standard transitional calculation, but a certificate could offer more, what is the harm in paying out the lower amount then applying for a certificate later to be able to access the difference?

My other bugbear is the pension scheme’s inability to reject an application for a certificate if it puts the member in a worse position. If the member mis-calculates or doesn’t understand the rules, they may apply for a certificate when it is not in their interest to do so. This can particularly be the case for those with pre A-day pensions who didn’t take tax-free cash and then had a BCE under the lifetime allowance. There is often an assumption that the certificate will give them a greater PCLS entitlement. However, pre A-day pensions are always dealt with as if tax-free cash was taken, even if that wasn’t the case.

If there is missing or incorrect information, then the pension scheme administrator can reject the certificate application. But if everything is in order, then legally the administrator must issue the certificate. What’s more, once the certificate is issued, the administrator cannot choose to ignore it and calculate maximum PCLS based on the standard calculation instead. We, like other providers, put warnings out, but have seen the odd case where we have no legitimate reason to reject the application, but the member is then worse off.

In this scenario it would be far more sensible to give the administrator the power to reject the certificate application, or to be allowed to put it to one side when presented if the member is better off using the standard calculation. Alternatively, the member could be given the ability to withdraw their application if the administrator pointed out that it would put them in a worse position.

In the two situations outlined above it appears legislation meets Consumer Duty in a head-on collision. Unfortunately, legislation will always win that battle, but it doesn’t sit comfortably.