HMRC corrects lifetime allowance legislation to relieve stuck pensions

The new pension tax rules are now over six months old. But they are still not yet completely correct.

Only two days before the start of the tax year, HMRC published a newsletter cautioning that parts of the legislation were wrong, and warning that some pension scheme members may need to wait until changes were made before taking or transferring certain benefits.

The result is that some pension schemes have been unsure whether paying out or transferring would land pension savers with an unwanted tax bill later, leaving some pension savers effectively stuck in the same place.

The good news is that HMRC has finally laid two new sets of regulations to correct the legislation for these niche cases. Both sets of regulations come into effect from 18 November 2024, and will be backdated to 6 April 2024.

Who is affected?

In April 2024, HMRC confirmed there were a few areas where the current legislation didn’t meet the policy intent and changes would be made by regulations. It went on to say “… members may need to wait until the regulations are in place before taking or transferring certain benefits. This is to ensure that their available allowances and tax position do not need to be revisited later in the year.”

The areas which the regulations change include:

• Scheme-specific lump sums (SSLS) – protection allowing some pension savers to take higher amounts of tax-free cash than the usual 25% of the pension pot. Pension savers may have needed to wait before accessing their higher tax-free cash lump sum.
• Enhanced and primary protection with protected lump sum – where pension savers have this type of protection, lump sums are incorrectly limited to £375,000, even when a higher protected amount was held. Pension savers may have needed to wait before accessing their higher tax-free cash lump sum.
• Transferring while holding enhanced protection – this protection would have been lost in respect of the transferred funds if a pension saver had transferred to a new arrangement after 6 April 2024.
• Lump sum death benefits paid from funds crystalised before 6 April 2024 – these lump sums shouldn’t be limited by the lump sum and death benefits allowance (LSDBA), but they are. Beneficiaries may have wanted to delay taking the lump sum payment until this was fixed.
• Transitional certificates when PCLS has been taken after age 75 – the Finance Act 2024 was written so any tax-free cash taken after age 75 was not included when applying for a transitional certificate. Pension savers may have waited until these new regulations take effect before applying for a certificate to make sure it would be valid.

The end is in sight

Abolishing the lifetime allowance was always going to be a complex legislative process, and the previous government was ambitious in its aims to push the changes through in just over a year.

But although mistakes were expected, many pension savers’ plans have had to be put on hold whilst they waited, for what is an exceptionally long time, for their tax position to be corrected. Thankfully, it now looks like the brakes will be taken off very soon.