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As the dust starts to settle on last week’s Spring Budget, and with the Finance Bill published today, TLT’s Pensions team reflects on the key themes and action points arising.
Of course, the measures announced last week still need to make their way through Parliament, and will face opposition both there and in the future, having already come in for strong criticism from the opposition. However, as things stand, the lifetime allowance (‘LTA’) will be abolished completely from 6 April 2024, with only the related tax charge changing from 6 April this year. We will be watching with interest how the draft legislation plays out, both as the Bill progresses and across the further work and consequential changes that will be required ahead of April 2024.
As an immediate action, employers, trustees and scheme managers should consider any members who may look to take benefits between today and the new tax year to ensure they consider their position before crystallising any benefits. Look to understand the changes as quickly as possible for members due to retire around and shortly after the changes come into force, and ensure that you, your trustees and administrators are prepared for a potential deluge of queries from members (active, past and potential). They will want to understand their current and future entitlements, protections and limitations, including both the benefits and the potential downsides to the new changes, as well as being reminded of the limits that remain in place. What if they start to pay into their pensions again, but a subsequent government reverses the decision? Also, are your administrators also ready in practice? As the Finance Bill makes clear, the concept of the LTA and associated benefit crystallisation events remain in place until 2024, and LTA checks, for example, will still be required in tax year 23/24.
Working with your HR department, review your scheme’s benefit design. For example, members who have opted out of membership of registered pension schemes due to the risk of tax charges in the past may now wish to opt back in (where permitted). Discuss what to do about any replacement salary or benefit arrangements that had been entered with high earners as an alternative to pension contributions under the current regime (and what contractual changes if any may be required). Don’t forget about automatic enrolment eligibility: specific exceptions to the duty to automatically enrol currently apply for those with LTA protections, schemes that prevent members with LTA protections from being automatically enrolled (or re-enrolled) should reconsider their approach. In addition, re-examine your death in service benefits provided outside the scheme. The tax-free aspect of lump sum death benefits is currently limited by reference to the LTA, and so the changes should mean fewer restrictions on design, and may remove the need for excepted group life cover policies outside of the registered pensions regime entirely.
Give your scheme documentation a health check: your rules may be wide enough to cope with changes to legislation – but this is not always the case. Some schemes may have been written to specifically restrict contributions to match certain limits / allowances, for example. And if caps are removed, are scheme liabilities affected? Booklets and other communications (including retirement quotes, information on the scheme website, etc) must also be reviewed in light of the changes, to ensure there is clarity for all concerned upon the applicable tax and benefit rules in place. Failure to update such documents could lead to member complaints and, in extreme cases, referrals to the Pensions Ombudsman.
The need for timely, clear and helpful communication runs through all of the above. Whilst pension scheme members will of course need to take their own tax advice on the impact, equally it’s important for employers and those managing pension schemes to provide their employees/members with clear and concise communications on recent developments, which in many cases will have a major impact on their retirement planning.
Another key point that will need to be reflected in communications is that pension commencement lump sums (‘PCLS’) are to be limited to a frozen monetary amount of a quarter of the current LTA at £268,275 (except where a member holds a protected right to a higher sum). Members will need to understand this point, including that its value will effectively dilute over time, particularly in a high inflationary environment. HMRC has confirmed that members with valid enhanced or fixed protections (where this protection was applied for before 15 March 2023) will from 6 April 2023 be able to accrue new pension benefits, join new arrangements or transfer without losing this protection.They will also keep their entitlement to a higher PCLS. (However, a lump sum exceeding the amount which could have been paid on 5 April 2023 will be subject to the member’s marginal rate of Income Tax on the excess.)
Finally, just because the LTA charge is to be removed doesn’t mean that specified lump sum benefits (which had been subject to potential LTA tax charges) are made tax-free: the Finance Bill makes sure these will instead now be taxed at an individual’s marginal rate. Further guidance from HMRC on how to report these lump sums is awaited, but members should be made aware of the change.
The rises in other limits, including the Annual Allowance (AA), Money Purchase AA, and tapered AA (together with the ‘adjusted income’ level at which the tapered AA applies to higher-earning individuals), will again need to be communicated and explained. Consider a Budget-special briefing or education session for members.
In addition to the Budget’s tax ‘simplifications’, employers and providers are also going to be encouraged by the Government to signpost employees to the ‘midlife MOT’ (aimed at supporting individuals with financial planning for later life).Look out for this campaign and be ready to build this information into your information for employees.
Whilst there will no doubt be twists and turns along the way, do keep a watchful eye on the progress of the legislation and its ins and outs.
Please speak to the TLT Pensions team for further detail on any of above, or on any of the other pensions-related announcements from the Spring Budget.
23 March 2023