LTA abolition – are you ready?

Correct as of 10am, 23rd April. This article is being maintained.

Tomorrow is “L Day”, when the Finance Act 2024 comes into force to abolish the Lifetime Allowance (LTA). However, many uncertainties remain around the effect of the legislation. Trustees should ensure administrators are aware of the latest position and ready to act accordingly.

Background – a tangled web

LTA abolition was announced, out of the blue, in the 2023 Spring Budget. Although sold as a dramatic simplification of the pensions tax regime, it was never going to be easy to unravel hundreds of legislative references before L Day.

HMRC has already acknowledged that in many places the drafting of the Finance Act, which received Royal Assent in February, does not reflect the policy intent. Several were resolved by Regulations laid on 14 March, but fixes for others are still awaited.

The latest update

Newsletter 158 came out only yesterday afternoon and confirms that a second set of Regulations will make a number of further corrections. Unfortunately, although the new Regulations will be backdated to 6 April, there will be a delay before they come into force. The newsletter therefore warns trustees against paying benefits before then to which unintended tax effects would currently apply.

In particular, HMRC says that schemes should ensure that members are aware of the need for further legislative changes and members may need to wait until the regulations are in place before taking or transferring certain benefits. These include:

• members with enhanced LTA protection may wish to delay any transfer;
• members with primary or enhanced LTA protection and protected lump sum rights could either take a PCLS limited to £375k or delay payment;
• PRs should not request payment of lump sum death benefits from funds which crystallised prior to 6 April 2024;
• members with scheme-specific lump sum protection should request a delay to payment of a protected PCLS.

The newsletter states that the issues to be corrected by the forthcoming Regulations “will not affect the vast majority of pension savers”. Whilst true, this does not eliminate the potential for significant complications for members who may be affected. Moreover, the examples above are not the only areas of confusion. Others include the tax treatment of certain overseas transfers and an array of unanswered questions around the new provisions for issuing tax-free amount certificates (TTFACs) to members.

Action required

As we move into a post L-Day world, trustees should ask their administrators to confirm they are monitoring this constantly-evolving landscape and able to ensure that, as far as possible, the latest position is reflected in their procedures and communications.

HMRC also says that any outstanding queries on the legislation, which are not covered in its newsletters or the Pensions Tax Manual, can be raised by email to: [email protected].

For further information, please speak to your usual contact at CMS.