Removal of the Lifetime Allowance – what schemes need to do now
The Lifetime Allowance for pension tax purposes will be removed with effect from 6 April 2024 (“L Day”) under new legislation. Trustees need to be prepared, and should consider what, if any, changes need to be made in advance.
Jeremy Hunt’s shock announcement in the 2023 budget that he was abolishing the lifetime allowance caused a lot of discussion. Some commentators doubted it would happen for the 2024/25 tax year – the lifetime allowance is bound up with a lot of the administration and reporting of pension schemes and it was a real challenge to remove the LTA altogether so quickly.
However, the Government has pressed ahead. The lifetime allowance charge was reduced to zero for the current 2023/24 tax year, and the more complex change to the structure of pension scheme taxation that comes with the removal of the lifetime allowance is now in the Finance Bill 2024, which is passing through the House of Commons currently.
In the meantime, pension scheme trustees do need to make sure they will not be caught out by the changes. The most important issue for trustees is to check whether they have any benefits under their rules that are expressed to be limited by the Lifetime Allowance. Unless the rules are amended prior to L Day, it will not be possible, as the law currently stands, to limit the benefit retrospectively once the LTA limit is removed in law. We recommend that the rules of the scheme are checked to ensure that this does not apply.
From a pensions administration point of view, this is certainly the biggest change to taxation since “A Day”, 6 April 2006 when the current registered pension scheme regime was brought in. Over the coming weeks and months, as HMRC finalises its processes and approach, pension scheme administrators will need to amend their processes to deal with L Day. Trustees should engage with their administrators to be sure that these changes are being dealt with as soon as possible.
Trustees may also need to consider communications with their members. L Day will change the way that some benefits are treated and may give rise to questions or even complaints from members. We would recommend working with administrators and lawyers to ensure that any changes that affect members are clear to them.
There is no question that, compared to the very long lead in time for A Day, L Day is happening in a very short timescale. Trustees will need to do what they can to manage this change, and an early review of the rules will ensure that there are no unintended consequences in the meantime.