Pension Lifetime Allowance – Frequently Asked Questions
16/02/2024 - 11 minutes readHMRC have released their pension lifetime allowance newsletter for Feb 2024 which contains answers for some of the most frequently asked questions.
Lump Sums and Lump Sum Death Benefits
Question 1 — what is the tax treatment of lump sum death benefits, paid in excess of the deceased member’s available allowance, where the payment is to non-qualifying persons?
If the lump sum is paid within the relevant two-year period, then the excess over the deceased member’s available lump sum and death benefit allowance is taxed as pension income. For non-qualifying persons who are not subject to the higher or additional rates of income tax, this will be basic rate tax (or the trust rate if applicable).
If the lump sum is not paid before the end of the relevant two-year period, then the whole of the lump sum is subject to the special lump sum death benefit charge.
This two-year rule does not apply to pension protection lump sum death benefits or annuity protection lump sum death benefits, consistent with their treatment before 6 April 2024.
Question 2 — how do pensions schemes determine the order in which relevant benefit crystallisation events have occurred?
It will be up to the member to decide on the order of their relevant benefit crystallisation events, for instance where more than one pension commencement lump sum or uncrystallised funds lump sum occur on the same day. HMRC are working to provide early guidance in this area.
Question 3 — will the pension commencement excess lump sum (PCELS) be payable by occupational pension schemes?
Yes. HMRC will be bringing forward changes to The Occupational Pension Schemes (Assignment, Forfeiture and Bankruptcy) Regulations 1997 to ensure that a PCELS is payable by occupational pension schemes.
Question 4 — given the payment of a trivial lump sum still requires available pension lifetime allowance, will this be amended?
Yes. HMRC will be bringing forward consequential changes to Article 23C of The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (SI 2006/572) to ensure that trivial lump sums can still be paid after 6 April 2006. Rather than requiring available pension lifetime allowance, members will require available lump sum allowance in order to be paid a trivial lump sum.
Transitional Arrangements
Question 6 — what is the definition of ‘Lifetime Allowance’ and ‘Benefit Crystallisation Events’ for the purposes of Part 6 of Finance Bill 2023-24 now that these have been omitted from Finance Act 2004?
These definitions have been removed from Finance Act 2004, however they retain the same definition as prior to their repeal. This is because paragraph 129(6) sets out that ‘a reference in any of paragraphs 125 to 128 or this paragraph to a provision of FA 2004 is to that provision as it had effect immediately before 6 April 2024’.
Question 7 — can individuals who have crystallised benefits through a BCE 5, 5B, or 8 apply for a transitional tax-free amount certificate which reflects the fact they have not received any tax-free amounts at these BCEs?
Yes. Individuals who have crystallised benefits at a BCE 5, 5B, or BCE 8, and who therefore believe that they have taken less than 25% of their pension lifetime allowance used at 6 April 2024 as tax-free amounts, can apply for a transitional tax-free amount certificate. Paragraph 129 of Finance Bill 2023-24 sets out that, to apply for a transitional tax-free amount certificate, individuals must provide complete evidence of each lump sum or lump sum death benefit (if any) that the individual became entitled to before 6 April 2024. As a result, the legislation does not preclude those who have crystallised benefits and not taken any tax-free amounts from applying.
Question 8 — if an individual has taken a pension commencement lump sum with scheme-specific lump sum protection prior to 6 April 2024, should the pension scheme adjust downwards the amount taken for the purposes of the transitional arrangements?
No. There will be no requirement for schemes to adjust down the amount of lump sums taken tax-free where the individual holds scheme-specific lump sum protection. Individuals with such protections will automatically have the benefit of their protection reflected in the standard calculation, as this requires that pension schemes deduct only 25% of the individual’s pension lifetime allowance previously-used amount from their lump sum allowance.
Likewise, only 25% will be deducted from their lump sum and death benefit allowance unless the individual has received a serious ill-health lump sum. Hmrc therefore do not expect that these individuals will need to apply for a transitional tax-free amount certificate.
Question 9 — under the standard transitional calculations (where the individual does not apply for a transitional tax-free amount certificate), what is the correct position where the member received a serious-ill health lump sum whilst under the age of 75 or where the member died under age 75 and their beneficiaries received a lump sum death benefit?
In these circumstances, paragraph 126(4) provides that 100% of the individual’s pension lifetime allowance previously used amount should be deducted from their available lump sum and death benefit allowance. It is not the case that only the appropriate percentage of their pension lifetime allowance previously used amount that was taken as a serious ill-health lump sum or lump sum death benefit should be deducted from their available allowance at the 100% rate. The previously used amount is not apportioned and the 25% rate does not apply.
Question 10 — will stand-alone lump sums be included in an individual’s transitional tax-free amount?
Yes. HMRC will be bringing forward changes, via regulations, to paragraph 129(1) of Finance Bill 2023-24 to ensure that any lump sums paid as a stand-alone lump sum before 6 April 2024, as far as that payment was free from income tax, is included in the lump sum transitional tax-free amount.
Transitional tax-free amount certificates
HMRC have received a lot of feedback on the application of transitional tax-free amount certificates and the following information provides further clarification.
Who should apply
The majority of members should not need to apply for a transitional tax-free amount certificate. The standard calculation will accurately reflect the tax-free lump sums they have taken prior to 6 April 2024. HMRC understand there are concerns that a higher volume of members than expected will apply for these certificates. HMRC guidance will make clear that the process outlined at paragraph 127 of Finance Bill 2023-24 should only be followed by members who have used less of their available pension lifetime allowance as tax-free lump sums than under the standard calculation — for instance they did not take their maximum pension commencement lump sum. Hmrc will publish guidance for members on GOV.UK following Royal Assent of the Finance Bill 2023-24, rather than from 6 April 2024.
Providing members with the opportunity to apply for transitional tax-free amount certificates is however necessary to ensure that they are not put in a worse tax position due to the standard transitional arrangements. Although no one will be put in a worse tax position by the standard transitional arrangements than they would have been under the pension lifetime allowance system.
Members should not apply for a transitional tax-free amount certificate where they believe that this might result in lower available allowances than under the standard transitional calculation. This is because the legislation does not allow for members to apply in order to compare the results under each process. If a transitional tax-free amount certificate is granted to a member, this provides for their new available allowances because it has put them in the correct tax position. There is no opportunity to revert to the standard calculation once a transitional tax-free certificate has been granted.
Complete evidence
The onus is on members to provide the evidence of their actual tax-free amounts used prior to 6 April 2024. This evidence constitutes part of the application. The legislation does not prescribe exactly what constitutes complete evidence because this would overly restrict what a scheme can and cannot accept. Complete evidence must therefore always account for the total amount of pension lifetime allowance used in order that schemes can determine what portion of those pension benefits were taken as tax-free lump sums.
However, evidence will need to be considered on a case-by-case basis. HMRC guidance will provide examples of what might be considered due diligence and accepted as complete evidence, for instance, we would expect members to provide documentation such as financial records, bank statements, or BCE statements.
How can MCL Accountants help with your queries on Pension Lifetime allowance?
Contact MCL Accountants on 01702 593 029 if you would like us to answer your queries on Pension Lifetime allowance or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.
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Ishan provides financial management, taxation and transactional advice to business entities of all sizes. His expert areas include statutory compliance, business taxation, personal tax & transactional processing and systems. Industry sectors include professional services, retail, hospitality and entertaining & media and advertising services.
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