The lifetime allowance is still with us
The removal of the lifetime allowance announced in the March budget has not yet come into effect. Trustees do need to keep operating the benefit crystallisation event reporting and other matters where the lifetime allowance is relevant, although the actual charge is zero. The lifetime allowance is to be removed, probably for the next tax year, but there remains uncertainty about what this will mean for pension trustees and administrators, particularly with Labour promising to reinstate it.
Jeremy Hunt’s announcement in the budget on 15 March that he will “abolish the lifetime allowance altogether” was the biggest shock to pensions tax since freedom and choice in 2014. However, despite the statement, the lifetime allowance has not yet been abolished and remains an important part of pensions administration.
The changes to date are radical. In particular, the lifetime allowance charge is set to zero, so the tax effect of having a benefit crystallisation event (BCE) in excess of the lifetime allowance is now radically different from the previous tax year. However, the difference really is with the taxpayer, not yet with anyone administering pensions. Reporting obligations remain as they are, until the lifetime allowance itself is removed, expected for the next tax year.
It is still very uncertain how the removal of the lifetime allowance will be effected. The lifetime allowance is a fundamental part of the pensions tax regime. The whole concept of payments to members is as much managed by the BCE framework as by the concept of unauthorised payments. The BCE framework itself is simply a way of calculating the amount of lifetime allowance used, and what charge applies.
This means that the abolition of the lifetime allowance is a major undertaking. The Finance Act 2004 will need significant rewriting to ensure that this works. There are a number of points that HMRC will need to settle including how much information it wants to receive about pensions coming into payment, now there is no need for BCE reporting for lifetime allowance reasons.
Even the changes to date are not complete. Certain payments that were subject to the lifetime allowance charge have now been amended to be subject to other tax payments, meaning that the lifetime allowance calculation is still needed for that tax. Fundamentally, the reporting requirements relating to BCEs and the lifetime allowance have not been removed, and schemes still need to keep records and make calculations as they did before.
Whether these obligations disappear in full when the lifetime allowance is removed is not clear, but until further changes are made, trustee obligations to calculate and notify BCEs have not altered. Trustees may also want to think about whether any other, non-statutory communications should be kept the same or changed. Members might still want to keep an eye on their lifetime allowance position, even now that the charge is zero.
One of the reasons that there is so much uncertainty here is the clear position that the Labour Party have taken that they would reinstate the lifetime allowance charge. Given the timing of the next election, it is not unlikely that a Labour government might follow in the next financial year, when the abolition of the lifetime allowance is expected. It is not implausible that the lifetime allowance is abolished and then reinstated in quite a short space of time, or alternatively that any abolition by the present government is then replaced by a new system that closely mirrors the arrangements that the Chancellor is working so hard to change.
The lifetime allowance charge might be zero, but pension schemes are still required to report on the lifetime allowance for at least another year.