More than 18 months on from the announcement of the abolition of the lifetime allowance (LTA), the amending legislation - including regulations correcting errors in the initial legislation - is now in place.
When the Finance Act 2024 and accompanying regulations came into force on 6 April this year, HMRC identified that there were a number of corrections required (as described in our Law-Now here) and that there could be unintended tax consequences if certain actions were taken in the meantime.
Regulations come into force today, with retrospective effect from 6 April 2024, which are designed to fix the problems identified by HMRC. Schemes may now go ahead and make transfers and pay benefits that they may have been delaying pending the corrections including:
- paying transfers and/or pension commencement lump sums (PCLSs) for members with enhanced LTA protection;
- paying PCLSs over £375,000 to members with primary or enhanced LTA protection and protected lump sum rights;
- paying lump sum death benefits from funds which crystallised prior to 6 April 2024; and
- paying PCLSs to members with scheme-specific lump sum protection.
As well making corrections, the new regulations also make a number of unheralded changes. These include an important modification to the way the £30,000 ‘commutation limit’ is calculated for the purposes of a trivial commutation lump sum (TCLS). The legislation in place from 6 April to 17 November 2024 (incorrectly) did not take account of the capital value of benefits taken in pension form and double counted some lump sums. The new regulations correct these issues but now also include all lump sums taken since 6 April 2006.
This means that lump sums which had previously been out of scope of the commutation limit must now be taken into account. Under the pre-6 April 2024 legislation, a number of lump sums were excluded, including winding-up lump sums, small pot lump sums and short-service refunds, but these will now be included in the calculation.
This could provide a challenge for schemes as the commutation limit applies across all registered pension schemes, not just the one paying the TCLS, and members may not have kept records of all lump sums taken in the last 18 years (where there would have been no requirement for them to do so). It is not clear whether this change is new HMRC policy or whether it is something which will be fixed by further correcting regulations. In the meantime, schemes should seek confirmation of all lump sums taken by the member before paying a TCLS.
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