As we try and settle into the new post-lifetime allowance (LTA) world, we are having to deal with a significant number of unintended consequences due to both the changes in the legislation and the fact parts of it are incomplete or incorrect.
The overarching issues appear to stem from the move from percentages used to real monetary amounts, and also the fact only the parts of the benefits paid tax free on crystallisation are tested.
These issues have made tweaking current legislation significantly harder, causing more issues than expected.
HM Revenue & Customs’ (HMRC) solution to these issues so far seems to be to delay clients’ retirement plans. However, this isn’t necessarily fair or practical, especially for those who – due to factors such as tax reasons or having only just reached minimum pension age – have had to wait until this tax year to access benefits.
Transitional tax-free amount certificates (TTFAC)
The introduction of these certificates seemed an addition too far with the change in regulations, but they will become essential in some cases where the standard calculations are clearly not fair.
Take those who reached the age of 75 before 6 April 2024, for example. The standard calculations for lump sum allowance (LSA) would mean BCE 5 and 5A would reduce the client’s available tax-free cash, unlike the LTA rules that ignored these for the purposes of tax-free cash calculation.
While the TTFAC can resolve this issue, it creates another one, by causing delays for the client should they wish to take cash in the near future. For example, TTFAC must be applied for before the first crystallisation occurs after 5 April 2024, which means those who would usually make a crystallisation early in the tax year may have to revise their plans to benefit should a TTFAC be required.
Scheme specific tax-free cash
Although we have been aware of issues with the scheme specific tax-free cash calculations for some time, we are still awaiting corrective legislation.
These issues are two-fold. Firstly, the way in which the amount of tax-free cash is revalued contains a form of double counting, which causes incorrect figures for the client.
Secondly, there are also problems with regards to the amount of LSA and lump sum and death benefit allowance (LSDBA) that will be used by this crystallisation. The second issue is generally less of a concern because it should be possible to retrospectively correct, providing the client doesn’t want to take cash payments from other schemes.
Unclear and outdated guidance
With the delays in issuing corrective legislation, HMRC has taken the rather odd view of updating the Pensions Tax Manual based on the incorrect legislation, despite knowing its flaws.
Even the updated legislation issued on 14 March has not fed through to the guidance manual, meaning the only source of truth is the multiple layers of legislation that may or may not still be updated.
Where do we go from here?
As with most legislative change, it isn’t the simple run of the mill cases that cause the issues, it is the complex or large cases that don’t all come to light on day one.
Just in week one, I found what I assume to be inconsistencies in the intent of the legislation and how the regulations have been written. These have clearly been challenged before to some extent but, from what I can see, no acceptable conclusion has been reached.
Given the rushed nature of these changes, it is not surprising we are in this situation. The HMRC team has been approachable and willing to listen, but they can’t fix all these issues as quickly as needed and, unfortunately, the calls from the trade bodies and industry as a whole to delay the implementation fell on deaf ears.
Claire Trott is divisional director of retirement and holistic planning at St. James’s Place
Comments