The UK lifetime allowance is going on 6 April: are you ready?    

Most of the legislative changes needed to remove the lifetime allowance from 6 April 2024 are contained in the Finance Bill 2023-24, which had its first reading in the House of Commons on 27 November 2023 and is continuing its passage through Parliament. However, it does not provide the complete picture. HMRC is issuing guidance on a regular basis and has confirmed that schemes can expect changes to the Finance Bill and new sets of regulations.

Changes that have already been made

In the current 2023-24 tax year, the lifetime allowance still exists and when members have a "benefit crystallisation event" (for example, become entitled to a scheme pension) scheme administrators must check whether the member has available lifetime allowance. However, where the lifetime allowance is exceeded, the lifetime allowance charge (55% on any excess over the lifetime allowance taken as a lump sum and 25% on any excess taken in any other form) no longer applies. Instead, some lump sum and lump sum death benefits are subject to income tax.

Major changes from 6 April

The lifetime allowance will be removed altogether from the start of the 2024-25 tax year. Instead, two new allowances, a "lump sum allowance" and a "lump sum and death benefit allowance", will limit the amount of lump sum and lump sum death benefits that an individual can receive tax free from registered pension schemes.

An individual's lump sum allowance will be £268,275 (one quarter of the current lifetime allowance) and their lump sum and death benefit allowance will be £1,073,100 (equivalent to the current lifetime allowance).

Benefit crystallisation events will go. Instead, there will be "relevant benefit crystallisation events" (RBCEs). For the new lump sum allowance, RBCEs will be when the member becomes entitled to a pension commencement lump sum (PCLS) or an uncrystallised funds pension lump sum (UFPLS) on or after 6 April 2024. RBCEs for the new lump sum and death-benefit allowance will be the member becoming entitled to a PCLS, an UFPLS, or a serious ill-health lump sum on or after 6 April 2024, or payment of a lump sum death benefit (other than a trivial commutation lump-sum death benefit or a charity lump-sum death benefit) in respect of the member on or after 6 April 2024.

Each time that a RBCE occurs on or after 6 April 2024, a member's allowance(s) will be reduced by as much of the relevant lump sum as is paid tax free. For example, if PCLS is paid then the member's lump sum allowance and lump sum and death benefit allowance will both be reduced by the whole of that PCLS. If an UFPLS is paid, the member's allowances would both be reduced by 25% of the UFPLS. A member who has used up either or both of their lump sum allowances will not be able to take a PCLS (but might be able to take a new form of payment – a taxable "pension commencement excess lump sum" –  instead) and will not be able to take any part of an UFPLS tax free. Where a member has used up all of their lump sum and death benefit allowance, any serious ill-health lump sum or lump sum death benefit that might have been paid tax free will be subject to income tax.

The rules are different for some other lump sums. For example, it will only be possible to pay a trivial commutation lump sum or a winding-up lump sum if a member has some lump sum allowance remaining. However, where part (25%) of that lump sum is paid tax free, this will not reduce either of the member's lump sum allowances. For a small lump sum, there will be no need to check whether the member has available lump sum allowance and the payment will not reduce their lump sum allowances.

The lifetime allowance protections (fixed protection and others) will remain and the members who have them will benefit from higher lump sum and lump sum and death benefit allowances. The last date for applying for fixed or individual protection 2016 will be 5 April 2025.

Other changes on 6 April

A host of other changes will be made in connection with the removal of the lifetime allowance.

From 6 April it will no longer be possible to pay a lifetime-allowance excess lump sum.

There will also be transitional provisions under which scheme administrators will need to calculate, for any member who had a benefit crystallisation event before 6 April 2024, how much of their new lump sum allowance and lump sum and death benefit allowance they are deemed already to have used. After doing this calculation, scheme administrators will have to provide a statement to the member.

The transitional provisions are broad brush. For example, for the purposes of calculating how much lump sum allowance a member has used they assume that the member took maximum (25%) tax-free cash when they took benefits in the past. However, members will have a time-limited right to provide evidence and ask scheme administrators to provide them with a "transitional tax-free amount" certificate. If they do this, then their allowances will be reduced by the exact amounts in that certificate, rather than in line with the assumptions in the transitional provisions. The option of applying for a certificate might be helpful, for example, to members who took some benefits before 6 April but took no, or less than the maximum amount of, tax-free cash. HMRC provides more information about the right to apply for a certificate and when it might be helpful (and unhelpful) to do so in its January and February 2024 newsletters.

There will be significant changes to event reporting and information requirements, knock-on changes to annual allowance calculations, changes to overseas transfer rules (including introduction of a new "overseas transfer allowance" equal to the member's lump sum and death benefit allowance) and a host of other adjustments to on-board before 6 April.

Actions for trustees and employers  

Trustees should check that their scheme administrators expect to be ready to implement all of the necessary changes to administration systems and procedures, payroll and reporting, member communications and retirement packs, member booklets and websites on and from 6 April 2024. Where legal review of changes is needed, or the scheme lawyers will be asked to prepare revised wording, we suggest agreeing timescales to ensure the legal advisers can complete this work before 6 April.

In addition to updating text, schemes need to decide what to say to members about, for example, the ability to apply for a transitional tax-free amount certificate. They also need to decide what to say about the potential for more change in the future; for example, in light of the Labour Party suggesting that it would reintroduce the lifetime allowance if it comes to power at the upcoming general election.

We also suggest asking the scheme administrators whether they are aware of any retirements that could be affected by the changes and whether it would be helpful to contact those members with a brief explanation of the changes and a suggestion that they take independent financial advice. For example, any member who is planning to take a lifetime allowance excess lump sum will need to do so before 6 April. Members expecting to retire around 6 April could also present particular questions in terms of need for a statement of the amount of the new allowances they will be deemed already to have used and awareness of the option of applying for a transitional tax-free amount certificate before their first RBCE.

Trustees should ask the scheme lawyers to confirm whether any changes are needed to the scheme trust deed and rules and, if so, whether those changes need to be made before 6 April. There are a number of points to consider. The types of rule we expect to be in most urgent need of review and action before 6 April are ones that limit benefits with reference to the lifetime allowance or a lifetime allowance charge, and ones written for members with lifetime allowance protection. Thought will also be needed in relation to offering an option to take a pension commencement excess lump sum: HMRC has confirmed that the definition of this new lump sum is going to change and it will be important to understand how this change will affect the size of payment a member could ask for.

Employers should understand the effect of the changes on pension scheme rules, on their policies for high earners, and on any top up pension or life cover arrangements. In this context, we confirm that the relaxation of fixed and enhanced lifetime allowance protection to allow members who obtained protection before 15 March 2023 to restart pension saving if they would like to is expected to continue beyond 6 April. We also anticipate excepted group life policy arrangements (EGLPs) will still have a place. The  introduction of the lump sum and death benefit allowance means that it will still be possible for lump sum death benefits to trigger a charge to income tax if they are paid from a registered pension or lump sum death benefit scheme. EGLPs are not registered and so the benefits in them are not subject to the lump sum and death benefit allowance.

Trustees and employers should also ask their advisers whether and how the changes affect any ongoing projects.

Osborne Clarke comment

The removal of the lifetime allowance is a significant change and involves a lot of work, particularly for scheme administrators. As the final pieces of this reform come together trustees, employers, scheme administrators and advisers will need to work together to ensure a smooth transition to the new regime.

This Insight was updated on 18 March 2024.

Since this Insight was published, the Finance Act 2024 has received Royal Assent and there have been a number of other developments. These include the release of regulations to make a number of changes. The changes made by the regulations include alteration of the conditions for payment of, and removal of "the permitted maximum" amount of, the new pension commencement excess lump sum. They also include the introduction of a time-limited override to help to preserve the effect of any rule in a registered pension scheme which "imposes a limit on the amount of a benefit payable under the scheme to, or in respect of, a member by reference to the member's lifetime allowance, the standard lifetime allowance or the lifetime allowance charge". Trustees and employers should still take legal advice on the need to amend the scheme trust deed and rules and the other matters listed above.