The Finance Act 2024 has brought significant changes to the pensions taxation regime. In particular, 6 April 2024 has seen the abolition of the lifetime allowance and introduction of a new (and more complicated) lump sum payment regime. These changes may have significant implications for some pension scheme members and of course these need to be understood fully by trustees and employers, particularly where separate unregistered/unapproved retirement benefit schemes are still used to provide “top-up” benefits calculated by reference to the lifetime allowance.
The lifetime allowance was introduced in 2006 and set a limit on the amount of pension savings an individual could accumulate within registered pension schemes across their lifetime without facing a lifetime allowance tax charge. Over the years, there have been a number of changes made to the amount of the standard lifetime allowance, with various forms of protection being introduced to enable pension scheme members to continue to benefit from a higher lifetime allowance, subject to them complying with certain conditions. However, the changes made by the Finance Act 2024 mark a complete departure by abolishing the lifetime allowance in its entirety.
Some potential consequences of the abolition of the lifetime allowance include:
- Encouraging pension savings: without the constraint of a lifetime allowance, individuals may feel more incentivised to save as they will know that their savings won’t be penalised by additional tax once they exceed a certain amount.
- Simplifying pension planning: as the abolition of the lifetime allowance removes the need for complex benefit crystallisation event calculations, pension planning can be streamlined and made a lot easier for pension scheme members.
Some guidance for pension scheme trustees following the abolition of the lifetime allowance:
- Review scheme documentation: trustees and their advisers should be thoroughly reviewing pension scheme documentation so that they can understand how the abolition of the lifetime allowance may impact scheme rules and members’ benefits. It may be necessary or desirable to update scheme documentation following these legislative changes.
- Consider unregistered/unapproved arrangements: where applicable, trustees and employers should also consider whether the abolition of the lifetime allowance may have any implications for the provision of benefits under unregistered/unapproved retirement benefit schemes, which were often put in place to provide “top-up” benefits over and above the lifetime allowance, including considering whether the changes might result in the entirety of members’ benefits being capable of being provided under the registered pension scheme. This could result in some interesting discussions between trustees and employers, and potentially result in increased benefits having to be provided under registered pension schemes which may not have been funded for. It could also give rise to some interesting legal considerations, such as the application of forfeiture rules in relation to benefits that have actually accrued under an unregistered/unapproved retirement benefit scheme.
- Update scheme administration: trustees should ensure their scheme processes and systems are updated to reflect the changes.
- Communicate with members: trustees should ensure they communicate effectively with scheme members following this change. This will help address any questions that members may have.
- Monitor legislative updates: trustees should stay informed of any other legislative changes on the horizon. Particularly with a General Election coming up, there is a possibility of further change in this area, including potentially the reintroduction of the lifetime allowance.
The abolition of the lifetime allowance implemented by the Finance Act 2024 is a significant change in the pensions taxation regime, with potential implications and consequences for pension scheme members, including where their benefits were previously subject to lifetime allowance-related caps in their pension scheme rules.
Although the removal of the lifetime allowance cap at first sight would suggest a simplification of the pensions taxation regime, in practice it introduces a number of complexities in relation to how benefits should be calculated where caps apply or where “top-up” benefits have typically been provided under separate unregistered/unapproved retirement benefit schemes. The new lump sum regime, introduced at the same time as the removal of the lifetime allowance, also gives rise to a number of complexities, particularly from an administration perspective; it is important that trustees and employers properly consider the implications of the changes for their pension arrangements, seek professional advice, and communicate with members where appropriate.