The removal of the lifetime allowance in the Budget was certainly an attention-grabbing headline.
It was the biggest change to pensions since George Osborne’s Pension Freedom budget of March 2014.
It sounded simple – just get rid of it, no more BCE (Benefit Crystallisation Event) tests, take all your fund without limit.
Of course, this is far from the truth. We now have just some of the draft legislation for what taking benefits will look like from April 2024 onwards. And it’s not pretty.
Instead of having tests against the lifetime allowance, we now have two allowances to consider.
The lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA). So, two new pieces of jargon to explain to your clients instead of one old one. Simple.
When HMRC released the draft legislation in July, it was accompanied by a policy paper. Contained in this – but not in the legislation – was a single sentence to throw another cat among the pigeons: “Individuals will still be able to receive the benefits which are currently tested against the LTA at BCEs 5C and 5D, but the values will no longer be excluded from marginal rate income tax under ITEPA (Income Tax (Earnings and Pensions) Act 2003), with effect from 6 April 2024.”
We must have all missed the bit in Jeremy Hunt’s speech when he announced a change in taxation of death benefits (these BCEs relate to uncrystallised funds used to provide beneficiary’s drawdown (5C) and annuities (5D)).
I would assume the rationale for this is that without a test the wealthy could leave an unlimited pot to be passed on to their beneficiaries as income entirely tax free were they to die before 75.
What I don’t quite get is why HMRC would choose to go down the route of taxing all uncrystallised funds on death pre-75 if taken as income, rather than bringing it in to line with the tax treatment of lump sums.
Under the new rules a lump sum paid out on death up to the LSDBA will be tax-free. Only the bit above will be subject to income tax. If uncrystallised funds are used to provide income then I would have thought they could be tested under the “death benefit allowance” bit of the lump sum and death benefit allowance and only the excess taxed to provide parity.
Until we get the rest of the legislation it’s not clear how the change will come into practice. The paper talks about being taxed under ITEPA – but currently pensions paid on death under 75 are exempt so this would need to be amended in addition to the Finance Act 2004.
What is clear is that the consequences of all these changes have not been properly thought through, and with an implementation deadline of April 2024 when we still only have half the story, getting ready will be challenging for advisers and providers alike.
Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster