UK Pensions Briefing | The 2024 Pension Tax Changes: Five Things To Know And Three Things To Do

We have had a new pension tax regime since April 6, 2024. The underlying legislation is convoluted and almost impossible for a lay person to follow, so you would be forgiven for thinking there was a lot to study.
UK Employment and HR
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We have had a new pension tax regime since April 6, 2024. The underlying legislation is convoluted and almost impossible for a lay person to follow, so you would be forgiven for thinking there was a lot to study. At the very granular level that is true, and your scheme administrators will have a lot of detailed changes to make to systems. However if you zoom out a bit, in many ways life hasn't changed.

We've done the poring over densely amended tax legislation for you. Here are the highlights: five things to know and three things to do.

Five things to know

1. The lifetime allowance is dead, long live the lump sum and death benefit allowance

From April 6, 2024, pension savers have a lump sum and death benefit allowance, rather than a lifetime allowance. It starts at £1,073,100 for tax year 2024-5, the same as the lifetime allowance was for tax year 2023-4. However, the focus of the new allowance is purely on tax-free amounts, not overall benefits.

Most of the penal tax charges on benefits above the allowance have fallen away, with both pensions and those lump sums which are not tax-free being treated as pension income of the recipient and subject to "normal" marginal rate income tax instead.

Much like the previous lifetime allowance, the new lump sum and death benefit allowance gets used up by benefits as they come into payment, but only the tax-free element of any benefit (the non-taxable amount) is deducted from the available allowance.

The lump sum and death benefit allowance applies across all benefits payable in respect of a member, whether during their lifetime or after death. However during the member's lifetime, the member also has a separate lump sum allowance which is used up in parallel.

The lump sum allowance starts at £268,275, which is 25 per cent of the lump sum and death benefit allowance. That smaller tax-free allowance applies only to a relevant lump sum taken by the member at the point of taking benefits – either a pension commencement lump sum or the defined contribution equivalent, an uncrystallised funds pension lump sum. The net effect is to keep tax-free limits where they were.

Rather than the previous rather convoluted regime of benefit crystallisation events, some of which were entirely artificial, the focus now is on when a person becomes entitled to a relevant lump sum although this may still be before it comes into payment. One side effect is that the cut-off age of 75 for a final test of the lifetime allowance falls away (more on that below). The point of entitlement is called a relevant benefit crystallisation event.

A lump sum is a relevant lump sum for the full lump sum and death benefit allowance if it is a pension commencement lump sum, an uncrystallised funds pension lump sum, a serious ill-health lump sum or any of the normal death benefit lump sums bar two. Lump sums going to charity on death are excluded as being entirely tax free, and trivial commutation lump sum death benefits are taxed in full.

The new regime applies for benefits taken on or after April 6, 2024, but there is a transitional regime to take account of benefits crystallised before that date. An individual's allowances are reduced by a figure which is a proxy for the value of any tax-free benefits already taken (or payable) under the previous regimes.

2. Pension commencement excess lump sum replaces lifetime allowance excess lump sum

There is a new authorised lump sum: the pension commencement excess lump sum.

Previously schemes were allowed to pay any benefits in excess of an individual's lifetime allowance as a lifetime allowance excess lump sum. This lump sum was taxed at a standard rate of 55 per cent. There was no requirement for a scheme to offer this option, and often payment of a lifetime allowance excess lump sum has been discretionary under scheme rules.

Now a pension commencement excess lump sum can be paid. This option only arises once an individual has completely used up their lump sum allowance, when an entitlement to pension then arises from which a lump sum can be commuted, but no other authorised lump sum can be paid. The lump sum can't reduce an earlier pension. Like the basic pension commencement lump sum, the pension commencement excess lump sum must be paid within six months before and 12 months after the member becomes entitled to it, but is taxed at the recipient's marginal rate of income tax.

If your scheme rules already provided scope for payment of a lifetime allowance excess lump sum, they are now deemed to permit payment of a pension commencement excess lump sum, but subject to any pre-existing restrictions in your rules. This is a temporary saving until April 2029 (see the Three things to do section of this briefing for more on scheme rules).

3. Tax protections continue

All the familiar grandfathering provisions are preserved. That means members continue to benefit from primary protection, enhanced protection, fixed protection, fixed protection 2014, fixed protection 2016, individual protection 2014 or individual protection 2016 as applicable. Members also retain any pre-2006 protected lump sums or other transitional protections from the previous regime.

An individual's lump sum and death benefit allowance is adjusted by a formula to reflect any applicable protections and where relevant the lump sum allowance is also increased.

The big change however is in the terms on which an individual can lose a registered protection. Enhanced protection and all types of fixed and individual protection could previously be lost by a member if there was relevant benefit accrual, new pension arrangements or certain types of benefit transfer. The principle now for pre-existing protection is that it is preserved even if there is now further relevant accrual or transfers etc. That principle applies only if the member had given notice to HMRC of their intention to rely on a particular protection before March 15, 2023, and that protection had not been lost in the interim.

Protections notified to HMRC on or after March 15, 2023, can still be lost. The deadlines for notifying all but fixed protection 2016 and individual protection 2016 have long since expired, so this really only applies to permitted late applications for the earlier protections and any new applications for one of the 2016 protections. Individuals have until March 5, 2025, to apply for either of the 2016 protections.

There are still a few wrinkles in the delivery of the principle of protected protections. HMRC is still working on fixes, so please also see the Three things to do section of this briefing.

4. New statements and certificates apply for the transition

Overall, scheme reporting and member information requirements have not changed significantly even if the calculations have. However, a new certificate and a one-off statement have been introduced as transitional measures to help ensure that member records are as up to date as they can be as at April 6, 2024.

In addition, transferring schemes will shortly be required to provide details of how much of any transferred funds crystallised before and after April 6, 2024.

Scheme administrators must calculate appropriate deductions to the available allowances to reflect any relevant benefits arising before April 6, 2024. The default calculations assume that the individual had taken the full 25 per cent tax-free lump sum when the pre-April 2024 benefits started. However if in fact a member had not taken the full amount, they should really see less of a deduction.

Members may now apply to a scheme administrator for a transitional tax-free amount certificateto reduce that deduction. HMRC expects members to apply either to the scheme for which they have an upcoming relevant benefit crystallisation event, or to the scheme from which they have taken the majority of their benefits to date.

The certificate constitutes approval by the scheme administrator of figures for available allowances after deductions based on pre-April 6, 2024, tax-free amounts actually received. Members will be required to notify all relevant schemes if they have a transitional tax-free amount certificate.

To get the certificate, the member must give "complete evidence" of all previous tax-free lump sums under the post-April 6, 2006, tax regime and, where relevant, pre-April 2006 pensions in payment. That means having complete and accurate records for all the tax-free benefits they received, and benefit crystallisation events that occurred, prior to April 6, 2024.

The application can only be made in the window before anyone actually becomes entitled to any new relevant lump sum or relevant death benefit lump sum in respect of that member. The scheme administrator must give the certificate within three months of the request, or refuse if insufficient evidence is given. The onus is on the applicant to provide complete evidence at the start.

A transitional tax-free amount certificate can be cancelled if it is incorrect. Even if it hasn't been cancelled, if an error in it comes to light, the lump sum recipient's tax liability must be recalculated and their tax paid adjusted.

Separately, and before April 6, 2025, scheme administrators must issue a one-off statement to or in respect of any member who has had a benefit crystallisation event before April 6, 2024, but did not have an actual entitlement to the relevant benefits by that date. This might be the case for example where a member has not brought their benefits into payment before age 75. The statement must set out what percentage of the standard lifetime allowance was used up by that pre-April 2024 BCE.

5. Everything else carries on as before

Everything else about the pre-April 2024 regime has essentially been kept in place. There is still an annual allowance, currently set at £60,000, with an associated annual allowance charge. There are also still authorised payments, unauthorised payments and a myriad of minor authorised payments for specific circumstances.

Three things to do

1. Hold fire on various benefits and transfers

HMRC has admitted that there are still a few drafting gaps in the new tax legislation that they are working to fix quickly. As a result, their April 2024 Newsletter 158 recommends that:

  • Transitional tax-free amount certificates take into account pension commencement lump sums and uncrystallised funds pension lump sums paid after age 75, even though they weren't technically benefit crystallisation events and currently aren't required to be included – they will be.
  • Members with enhanced protection hold off any benefit transfers until legislation is passed to transfer their protections with them.
  • Members with enhanced protection or primary protection with protected lump sums, who should be able to take a larger pension commencement lump sum than the standard lump sum allowance, should delay taking that lump sum until legislation is passed to treat the larger sum as a fully tax-free pension commencement lump sum.
  • Members with scheme-specific lump sum protection should also delay taking a pension commencement lump sum while some calculation issues are resolved, including where there has been a transfer to a new provider.
  • Personal representatives of deceased members should hold off requesting any lump sum death benefit from funds which crystallised before April 6, 2024, to ensure it can be paid tax-free.
  • Members with benefits crystallised before April 6, 2024, should defer any request to transfer to a qualifying recognised overseas pension scheme until problems are resolved with double-counting and not counting previously-used lifetime allowance in the overseas transfer allowance.

2. Update your scheme rules

So far our review of various sets of clients' scheme rules has shown that most will need a few changes over the next few months, but urgent sweeping changes should not generally be necessary. In most cases, existing scheme rules will wrap fairly comfortably around the new tax regime. The new tax legislation also includes some quite helpful saving provisions.

Any rules which previously paved the way to pay a lifetime allowance excess lump sum are temporarily being treated as if they allowed the payment of a pension commencement excess lump sum in the same circumstances. This saving will last until April 2029, but does depend on there having been a power in place already.

In addition references in rules to tax provisions which have been replaced or moved will be taken to refer to whichever version of those provisions is relevant for the particular period and activity in question.

Please let us know when you would like your scheme rules reviewed for the relevant updates.

3. Look out for age discrimination on age 75 benefits

We are seeing a number of scheme rules which have inadvertently become potentially age discriminatory as a result of the tax changes, and need to be reviewed.

There is an automatic exemption from age discrimination requirements where discrimination is required to comply with tax requirements. However, a side effect of the benefit crystallisation event structure being simplified is that in many cases lump sum benefits may now be paid to a member after 75 in much the same way as they could before that age. As a result, differentiating benefit entitlements based on whether payment is before or after age 75 is no longer a requirement.

That means that, unless the differentiation can be justified on other objective grounds, benefit structures may need to be adjusted. We would recommend that all schemes revisit any benefit entitlement which are tied to being under age 75. Please let us know if you would like us to review your scheme rules for this issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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