FB 2024: The pension changes
The lifetime allowance is to be abolished – but equivalent limits will continue to have tax implications
Pension changes – what is the impact?
The lifetime allowance will, as previously announced, be abolished with effect from 6 April 2024 – but equivalent limits will continue to have tax implications (restricting, for example, the amount of tax-free cash a registered pension scheme member can take). Existing tax exemptions in the event of a pension scheme member’s death before reaching age 75 are to be preserved – but ‘lifetime allowance excess’ funds transferred from a registered pension scheme to a qualifying recognised overseas pension scheme are now to be taxed. This article discusses these changes in more detail and also considers the accounting implications of an announcement in the Autumn Statement that there will be a change to the free-standing tax charge applying to certain defined benefit pension schemes.
Key Finance Bill provisions
If enacted in its current form, the Autumn Finance Bill provides for the abolition of the lifetime allowance with effect from 6 April 2024, confirms the previous abolition of the lifetime allowance charge and clarifies the taxation of lump sums, lump sum death benefits and non-UK pension plans, the application of protections, transitional arrangements and reporting requirements.
As previously announced this legislation also preserves, in the event of the death of a member of a registered pension scheme before reaching age 75:
- The existing tax exemption (for funds within the new lump sum and death benefit allowance – equivalent to the old lifetime allowance limit) for any subsequent lump sum payment from the scheme to the deceased member’s beneficiaries; and
- The existing tax exemption for any subsequent pension payments from the scheme (where the scheme operates on a defined contribution basis) to the deceased member’s surviving spouse, children or dependants.
The old ‘benefit crystallisation event’ regime will essentially continue to apply (although there will be some administrative changes - HMRC have confirmed in their most recent pensions newsletter that they will provide further details via a ‘lifetime allowance newsletter’ in due course).
Tax-free cash from registered pension schemes
However, notwithstanding the abolition of the lifetime allowance, the amount of tax-free cash that a member can take from a registered pension scheme after reaching age 55 will continue to be restricted to 25 percent of the lower of the lump sum allowance (again equivalent to the old lifetime allowance limit) and the value of the member’s benefits.
Existing tax exemptions where pension scheme members die/become seriously ill before 75
Additionally, where a member of a registered pension scheme dies before reaching age 75, any subsequent lump sum payment from the scheme to the deceased member’s beneficiaries will continue to be tax exempt only insofar as not exceeding the lump sum and death benefit allowance – any serious ill-health lump sum taken by a terminally ill member of a registered pension scheme before reaching age 75 will also continue only to be tax exempt insofar as it is within this limit.
Taxing ‘lifetime allowance excess’ funds transferred to qualifying recognised overseas pension schemes
Transfers from registered pension schemes to qualifying recognised overseas pension schemes - which can currently be made completely free of UK tax provided certain conditions are satisfied, irrespective of the amount transferred - will also in future be subject to the 25 percent overseas transfer charge insofar as they exceed the overseas transfer allowance (again equivalent to the old lifetime allowance limit).
This essentially reverts to the pre-6 April 2023 position, as before then any such excess was instead subject to the now abolished lifetime allowance charge at 25 percent.
Therefore, despite certain previous indications, the UK tax treatment of distributions from qualifying recognised overseas pension schemes/non-UK pension plans to which UK tax-relieved contributions have previously been made does not appear to have been made any more favourable – indeed, it still appears to be the case that any ‘lifetime allowance excess’ in such plans can (notwithstanding the abolition of the lifetime allowance charge) trigger penal UK tax charges in certain circumstances.
What should employers be thinking about?
In the light of the abolition of the lifetime allowance (and certain previous changes to the annual allowance testing regime) employers may wish to review their remuneration strategies (pension contributions vs cash allowance etc) - although bearing in mind the possibility of further changes following the next general election.
Secondary legislation announced at the Autumn Statement
From 6 April 2024 the free-standing tax charge that applies to authorised surplus payments to sponsoring employers of a registered defined benefit pension scheme will reduce from 35 percent to 25 percent. Companies which have previously been using the 35 percent rate in their financial statements to measure any deferred tax arising on their pension surplus will need to consider the tax accounting impact of this change from both a disclosure and quantum perspective. This measure will be legislated for via Statutory Instrument and therefore substantive enactment will not occur at the same time as the Autumn Finance Bill.
How can KPMG help?
KPMG’s pension tax specialists can help you understand the impact of these changes for your business and your workforce. Please contact the authors of this article, or your usual KPMG in the UK contact, to discuss further.
