Guidance

Newsletter 158 — April 2024

Published 4 April 2024

Abolition of the lifetime allowance (LTA) — communications and guidance

From 6 April 2024, information to support you to implement the LTA abolition will continue to be included in regular pension schemes newsletters. Separate LTA guidance newsletters will also be published where required, but frequently asked questions (FAQs) will no longer be fortnightly. A consolidated copy of all FAQs published to date has been circulated to the LTA working group and will be published in a newsletter later this month.

If you have any outstanding queries on the legislation to abolish the LTA, including specific concerns about delivering these changes, you should check the guidance available in previous newsletters and in the Pensions Tax Manual (PTM), which has now been updated. You can also contact us by email: [email protected].

If your queries or feedback related to the PTM, you should email: [email protected]. PTM pages related to the LTA have now been archived, but remain publicly available on the National Archives website. You can also feedback on PTM guidance by using the ‘report a problem with this page’ tool at the bottom of each page.

Abolition of the lifetime allowance (LTA) — further regulations

As highlighted in pension schemes newsletter 157, on 14 March 2024 the government made The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024. These are effective from 6 April 2024.

The newsletter also confirmed that there would be further minor technical changes made through a second set of regulations. Whilst important, they will not affect the vast majority of pension saves. They relate primarily to specific protections or to individuals who plan to transfer their pension savings to a qualifying recognised overseas pension scheme (QROPS).

This article:

• sets out the changes which will be made
• provides guidance on how schemes should operate during the interim period before these regulations come into force
• highlights some further areas still under consideration

The regulations will be made shortly and, when introduced, will be effective from 6 April 2024. Under the circumstances set out in this newsletter, schemes should ensure that members are aware of the need for further legislative changes. As a result, members may need to wait until the regulations are in place before taking or transferring certain benefits. This is to ensure that their available allowances and tax position do not need to be revisited later in the year.

Transitional Arrangements — cancellation of a transitional tax-free amount certificate

A transitional tax-free amount certificate (TTFAC) may be revoked where it is found to be erroneous. If an relevant benefit crystallisation event (RBCE) has occurred before the revocation of the certificate, the March 2024 lifetime allowance guidance newsletter (see question 25) confirmed that previous RBCEs will be recalculated based on the actual transitional tax-free amounts. The individual may be liable to pay further tax. This remains the case.

However, where the revocation of a certificate reveals that the member should have had no lump sum allowance available, it is possible that previous payments were unauthorised. This includes where either:

• there has been a previous RBCE consisting of the payment of a pension commencement lump sum (PCLS)
• a scheme has paid a trivial commutation lump sum (TCLS) or winding up lump sum (WULS) since 6 April 2024

The government will therefore bring forward legislation to provide that, under such circumstances, these lump sums will not be treated as unauthorised payments. They will however be fully taxable at the individual’s marginal rate.

Given the time required for a TTFAC to be issued and subsequently cancelled, we do not expect this issue to materialise before the amending legislation comes into force.

Transitional arrangements — PCLS and uncrystallised funds pension lump sum (UFPLS) after age 75

Currently, the payment of a PCLS or UFPLS after age 75 is not a benefit crystallisation event (BCE). This is because the individual’s remaining uncrystallised benefits would have been tested against the LTA at age 75. However, when applying for a TTFAC, paragraph 129(3) of Finance Act (FA) 2024 only considers lump sums which were paid as a BCE under Part 4 of FA 2004.

The government will therefore bring forward legislation to provide that the transitional tax-free amount considers any PCLS or (tax-free element of an) UFPLS paid after age 75. This will ensure that any TTFAC issued accurately reflects any tax-free lump sums received prior to 6 April 2024.

Schemes should ensure that this information is included in any TTFAC issued where relevant, as once the amending legislation comes into force and is applied retrospectively to 6 April 2024, any TTFAC issued which does not reflect these amounts will be incorrect.

Transitional arrangements — transitional tax-free amount certificates (TTFACs) and annual relevant benefit crystallisation event (RBCE) statements

Paragraph 125(5) of FA 2024 requires that RBCE statements, where an individual has a TTFAC in force, should show the actual amounts of lump sum allowance (LSA) and lump sum and death benefits allowance (LSDBA) used. The statement should no longer assume the standard transitional calculation. We are aware that there is no requirement on members to notify all their schemes that they are relying on a TTFAC. As a result, schemes may not be aware of this fact and may not be reporting correct information to members.

The government will therefore bring forward legislation to require individuals to notify their schemes (under which they have remaining rights) that they are relying on a TTFAC, and that schemes must only report the actual amounts of LSA and LSDBA used at the point at which they become aware that the member is relying on a TTFAC.

Given the time requirements to issue a response to a TTFAC, we do not expect this issue to materialise until the amending legislation comes into force. Where schemes should have been reporting actual amounts paid but have assumed the standard transitional calculation because they did not know a TTFAC was in force, HMRC recognises that schemes will have acted on the basis of the information available to them.

Transitional arrangements — applications for a TTFAC

The March 2024 lifetime allowance guidance newsletter (see question 24) confirmed that the current legislation only permits individuals to apply to a registered pension scheme of which they are a member. Where an individual has crystallised all their rights in the purchase of an annuity, this will mean that they or their legal personal representative cannot apply for a TTFAC. The government will therefore bring forward legislation to provide that applications may be made to an annuity provider.

Until this legislation is effective, it will remain the case that individuals can apply only to a registered pension scheme of which either:

• they are a member
• a deceased individual was a member immediately before their death

When the amending legislation comes into force, GOV.UK guidance will be updated to inform individuals that they may now also apply to an annuity provider.

Reporting requirements — provision of information between schemes

Lump sum death benefits paid from funds which crystallised prior to 6 April 2024 will not reduce an individual’s lump sum and death benefit allowance and will be tax-free (see pension schemes newsletter 157). However, where a member transfers to a new provider, we are aware that there is no requirement for the scheme making the transfer to provide the receiving scheme with any information about how much of any funds crystallised before and after 6 April 2024. There government will therefore bring forward legislation to require schemes to exchange this information.

Although the reporting requirement will not be in force for 6 April 2024, because it will be retrospective to this date, as soon as they are able schemes should start to provide such information where relevant upon the transfer of rights to another provider.

Enhanced protection (EP) — transferring to a new provider

Pension scheme newsletter 157 confirmed that the government would bring forward legislation to provide that individuals with enhanced protection can transfer their pension savings to a new provider and carry over the benefit of their protection, even though their permitted maximums for a lump sum or lump sum death benefit currently operate on a per arrangement basis.

Until the amending legislation is effective, members with enhanced protection may wish to delay transferring to a new provider.

Enhanced protection (EP) and primary protection (PP) — protected lump sum rights of more than £375,000

Pension scheme newsletter 157 stated that the policy intent is for individuals with enhanced protection or primary protection and protected lump sum rights to be able to take a PCLS over their lump sum allowance of £375,000. It highlighted that HMRC is aware of the issue whereby paragraph 1(b) of Schedule 29 to FA 2004 prevents this and confirmed that the government would bring forward legislation to address this issue.

Until the amending legislation is effective, members may either:

• take a PCLS up to £375,000 — in this case the member would forgo their protected entitlement as any amount subsequently paid would not meet the conditions to be a PCLS
• delay to the payment of their PCLS in order that they can take their full entitlement — a PCLS can be paid 6 months before and up to 12 months after the member becomes entitled to it

Lump sum death benefits (LSDBs) — payments from funds which crystallised prior to 6 April 2024

Pension scheme newsletter 157 confirmed that the payment of a LSDB from funds which crystallised prior to 6 April 2024 may be limited by the permitted maximum. This is unintentional. The policy is that the payment of LSDBs from such funds are entirely tax-free. The government will therefore bring forward legislation to resolve this issue.

Until the amending legislation is effective, legal personal representatives may wish to delay requesting the payment of a lump sum death benefit where the payment would be made from funds which crystallised prior to 6 April 2024.

Consequential changes

The government will also bring forward legislation to address the following consequential changes:

• amend various references to benefit crystallisation events (BCEs) and to the LTA in The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (SI 2006/572)
• amend various cross-references within The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 to Chapter 15A Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) where these no longer align to the correct sections
• remove the reference to BCE 5 in The Registered Pension Schemes (Notice of Joint Liability for the Annual Allowance Charge) Regulations 2011 (SI 2011/1793)

Overseas transfer allowance (OTA) — benefits crystallised into drawdown

Regulation 4(12) of The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 provides that, where an individual has crystallised benefits prior to 6 April 2024, their OTA is reduced by 100% of their LTA previously-used amount. This would include any amount designated to drawdown. However, should these same funds designated to drawdown be transferred to a QROPS after 6 April 2024, they will again be deducted from the OTA. The government will therefore bring forward legislation to provide that such funds are not double counted against the OTA.

Until the legislation is effective, affected members may wish to defer their request to transfer rights held under a registered pension scheme to a QROPS.

Overseas transfer allowance — pre A-day benefits

Regulation 4(12) of The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 provides that, where an individual has crystallised benefits prior to 6 April 2024, their OTA is reduced by 100% of their LTA previously-used amount. However, unlike the transitional arrangements for the lump sum and death benefit allowance, there would be no deduction of benefits crystallised prior to 6 April 2006 where the member has not then had a BCE between this date and 5 April 2024. This is because paragraph 20 of Schedule 36 to FA 2004 does not apply to the OTA provisions. The government will therefore bring forward legislation to provide that the transitional reduction to a member’s OTA includes pre-A day pensions in payment.

Until the legislation is effective, affected members may wish to defer their request to transfer rights held under a registered pension scheme to a QROPS.

Scheme-specific lump sum protection — calculating a member’s entitlement

Regulation 3 of The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 made changes to paragraph 24 of Schedule 36 to FA 2004. This provides the calculation for the additional lump sum amount where a member holds scheme-specific lump sum protection. We are aware that this formula double counts certain benefits and therefore does not operate as intended. The government will therefore bring forward legislation to resolve this issue.

Until this legislation is effective, affected members may wish to request a delay to the payment of a PCLS under scheme-specific lump sum protection.

Scheme-specific lump sum protection — reduction to an individual’s lump sum allowance

Pension scheme newsletter 157 confirmed that the government would bring forward legislation to provide that an individual’s lump sum allowance is reduced on the payment of a PCLS under scheme-specific lump sum protection by 25% of the total value of that lump sum plus the pension in connection with which it is paid.

Until this legislation is effective, given the technical error with the formula for calculating the additional lump sum amount, affected members may wish to request a delay to the payment of a PCLS under scheme-specific lump sum protection.

Scheme-specific lump sum protection — transferring providers

Article 23 of The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (SI 2006/572) further modifies the calculation for scheme-specific lump sum protection. This applies in circumstances where members have transferred to a new provider. The government will bring forward consequential legislative changes to amend this calculation in line with amendments to paragraph 34 of Schedule 36 to FA 2004.

Affected members should still be able to transfer their rights to a new provider before the amending legislation is effective. However, given the technical error with the formula for calculating the additional lump sum amount, they may wish to defer the payment of a PCLS under scheme-specific lump sum protection.

Financial Assistance Scheme (FAS) and Pension Protection Fund (PPF)

Various regulations which provide for the tax treatment of lump sums paid by the FAS and the PPF point towards legislation which has been repealed or amended due to the abolition of the LTA.

The government will bring forward legislation to align the payment of lump sums by the FAS and the PPF with the new pension tax regime. In addition to consequential changes, amendments will be made to FAS and PPF regulations so that any lump sums which were tested against the LTA will be tested against either:

• the lump sum allowance
• both the lump sum allowance and lump sum and death benefit allowance

Any lump sums which required available LTA will require available lump sum allowance. These regulations will be retrospective to 6 April 2024.

Public service pensions remedy — impact of lifetime allowance abolition

The impact the abolition of the lifetime allowance (LTA) has on how the public service pensions remedy is implemented for a member depends on the scheme type and the status of the member.

Types of schemes

Chapter 1 schemes provide benefits for public service employees that are not provided under Chapter 2 or Chapter 3 schemes. 

Chapter 2 schemes provide benefits for judges.

Chapter 3 schemes provide benefits for local government employees.

Member status

A protected member is someone who remained in the legacy pension scheme throughout the remedy period until they were moved to the new scheme on 1 April 2022.

An unprotected member is someone who was moved to the new scheme on 1 April 2015.

A taper-protected member is a member who remained in the legacy scheme for part of the remedy period, moving to the new pension scheme before 1 April 2022.

Chapter 3 schemes

The remedy for these schemes is not retrospective for tax purposes. This means that if the amount of a pensioner member’s benefits changes as a result of the remedy, there is no change to the amount of LTA used up when the member’s benefits first crystallised. 

If a pensioner member’s benefits increase as a result of the remedy, this will be a new benefit entitlement for tax purposes. If this entitlement arose before 6 April 2024 the LTA rules in place at the point of that crystallisation will apply. Where the entitlement occurs on or after 6 April 2024, the benefit needs to be considered against the new rules. There will no longer be an LTA test when benefits are put into payment, but there is a limit on the amount an individual can take tax free. Whether or not a member can have a pension commencement lump sum (PCLS) will depend on if they have available lump sum allowance.

Where a member has put pension into payment before 6 April 2024 the scheme administrator will need to issue:

• annual benefit crystallisation event (BCE) statements in respect of tax years up to and including the tax year 2023 to 2024
• annual relevant benefit crystallisation event (RBCE) statements in respect of the tax years 2024 to 2025 onwards

If benefits are first put into payment on or after 6 April 2024, scheme administrators should follow the ‘business as usual’ processes for benefit payments from 6 April 2024. There are no special steps to take as a result of the remedy.

Chapter 1 schemes — deferred choice members

A deferred choice member is a member with pensionable service during the remedy period (remediable service) who has not taken benefits (or died) before 1 October 2023.

Deferred choice members should be given the option before they retire of taking new scheme benefits (make a new scheme benefits election under section 10 Public Service Pensions and Judicial Offices Act 2022 (PSPJOA)) in relation to their service during the remedy period.

Benefits in payment — on or after 6 April 2024

If benefits are first put into payment on or after 6 April 2024, scheme administrators should follow the ‘business as usual’ processes for benefit payments from 6 April 2024. There are no special steps to take as a result of the remedy.

Benefits in payment — before 6 April 2024

Some members who retired shortly after the remedy was implemented in October 2023 may not have been offered that choice before their benefits started. These members must still be given the option to make a new scheme benefits election. That election would be made after their benefits have been put into payment but under section 11(3) PSPJOA, any new scheme benefits election takes effect from immediately before that member took benefits. This changes the amount of the member’s benefit entitlement from that point.

Where a deferred choice member who became entitled to benefits before 6 April 2024 makes a new scheme benefits election (or are treated as having made a new scheme benefits election under section 12 PSPJOA), as the amount of their benefit entitlement has changed retrospectively, the amount of LTA used will also change.

For deferred choice members with benefits in payment before 6 April 2024, who made, or are treated as making, their benefit choice before their benefits started, scheme administrators will need to issue:

• a BCE statement in respect of the tax year 2023 to 2024
• annual RBCE statements in respect of the tax years 2024 to 2025 onwards

For a deferred choice member who, before 6 April 2024, became entitled to benefits and then made a new scheme benefits election, that was not implemented before that date, the scheme administrator will need to issue:

• a revised BCE statement in respect of the tax year 2023 to 2024 showing the revised percentage of standard LTA used
• annual RBCE statements in respect of the tax years 2024 to 2025 onwards

Where a member with enhanced protection or a form of fixed protection makes a new scheme benefits election after their benefits have started, a relevant benefit accrual test, or benefit accrual test will be needed to check if the member still has LTA protection. For members with a form of fixed protection, a benefit accrual test will also be needed when the member is rolled back to the legacy scheme to ensure that the member still has that form of fixed protection.

More details of the tax treatment of top-up benefit payments or benefit overpayments can be found in this newsletter.

Chapter 1 and Chapter 2 schemes — immediate choice members

Members of a Chapter 1 scheme with remediable service who started benefits before 1 October 2023, or died before that date, are classed as ‘immediate choice’ members. 

The pension scheme manager will give the member, or their beneficiary, a remediable service statement. They will then make a choice between legacy scheme benefits or new scheme benefits in respect of the period of remediable service. Whether the amount of the member’s benefit entitlement changes, and the date of that change, depends on the type of member (protected, taper protected or unprotected) and the choice made. 

The amount of the member’s benefit entitlement will not change for:

• a protected member who chooses legacy benefits
• an unprotected member who makes a new scheme benefits election

For taper-protected members and unprotected members who choose legacy benefits the amount of their benefit entitlement will change, and they are treated as always having been entitled to that amount of benefit.

The amount of the benefit entitlement will change for a protected member or taper-protected member who makes a new scheme benefit election. The member’s entitlement will change from the time immediately before they started their pension. For a member who dies before drawing benefits the change takes place immediately before the member’s death.

For Chapter 2 schemes, judges with remediable service have been given an immediate choice between benefits under an unregistered judicial legacy pension scheme or a registered judicial 2015 scheme for the remedy period. Whatever choice is made by, or in respect of, a judge, the benefits will be treated as always having accrued on the chosen basis.

The amount of a judge’s benefit entitlement under a registered pension scheme will change for:

• tapered protected members
• unprotected members for whom a legacy scheme election is made

No change in benefit entitlement

If a member’s benefit entitlement does not change there is no specific public service pension remedy action needed. Scheme administrators should issue:

• annual BCE statements up to and including in respect of the tax year 2023 to 2024
• annual RBCE statements in respect of the tax years 2024 to 2025 onwards

Change in benefit entitlement

Where a member’s benefit entitlement changes, the amount of the LTA used up by the benefit crystallisation will need to be recalculated. Where a member with enhanced protection or a form of fixed protection makes a new scheme benefits election, a relevant benefit accrual test, or benefit accrual test will be needed to check if the member still has LTA protection. For Chapter 1 members with a form of fixed protection, a benefit accrual test will also be needed when the member is rolled back to the legacy scheme to ensure that the member still has that form of fixed protection.

Scheme administrators should issue:

• revised BCE statements showing the revised percentage of standard LTA used for the tax yeas up to and including 2023 to 2024
• where the amount of any LTA charge has changed (or an LTA charge is now due), a revised (or new) statement under regulation 12 SI 2006/567 (see PTM164300) showing the amount of the revised or new LTA charge
• annual RBCE statements in respect of the tax years 2024 to 2025 onwards — if the member’s choice is not implemented until 2025 to 2026 or later, the annual RBCE certificate will also need to be revised to show the correct amount of lump sum allowance and lump sum and death benefit allowance used

Tax treatment of top-up benefit payments and impact on allowances

This advice applies to top-up payments to benefits a member became entitled to before 6 April 2024.

The payment of a top-up lump sum to the member is not an RBCE for the purposes of either section 637Q or 637S ITEPA 2003.

How a top-up lump sum is authorised and taxed depends on the circumstances in which it is paid.

Top-up lump sum paid to member on or after 6 April 2024 intended to be a PCLS

If the additional lump sum is paid to the member within 12 months of becoming entitled to the original PCLS, the payment is considered against the standard PCLS payment conditions set out at paragraph 1 of Schedule 29 Finance Act (FA) 2004. 

If the additional lump sum paid to the member is not paid within 12 months of becoming entitled to the original PCLS, where the payment meets the conditions of regulation 18 SI 2023/113, the top-up lump sum payment is a PCLS. 

For both situations the action of paragraph 130A of Schedule 9 FA 2024 (inserted by regulation 4(21) SI 2024/356) means that:

• the payment is a BCE 6 — the date of the BCE is when the member became entitled to it in accordance with section 166(2)(a) FA 2004 (that is the same date the member became entitled to the first PCLS payment)
• the maximum amount of the PCLS depends on the member’s available LTA
• the payment is tax-free in accordance with section 636A ITEPA 2003
• the payment reduces the amount of the member’s available lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) in accordance with paragraphs 125 and 126 of Schedule 9 FA 2024
• if a member applies for a transitional tax-free amount certificate, they will need to provide complete evidence of both the original and top-up lump sum payments

Top-up lump sum paid on or after 6 April 2024, and after member’s death, intended to be a PCLS

Regulation 24 SI 2023/113 sets the conditions where a top-up payment to a PCLS is paid following the member’s death may be an authorised payment. It provided for the top-up lump sum to get similar tax treatment to the top-up PCLS paid during the member’s lifetime.

Following the abolition of the LTA, this regulation no longer gives this tax treatment.

The government will bring forward further regulations to ensure that where the top-up lump sum would have been a PCLS if it had been paid to the member in their lifetime:

• it is to be treated as a PCLS paid to a member of a registered pension scheme
• the top-up lump sum is a BCE 6 that occurs on the same date as the BCE for the original PCLS paid to the member
• the amount crystallised is the amount of the payment

Top-up lump sum paid to member on or after 6 April 2024 intended to be an LTA excess lump sum

Paragraph 130A of Schedule 9 FA 2024 provides that where a member became entitled to a lump sum before 6 April 2024, but it is not paid until on or after that date:

• the pre-6 April 2024 legislative conditions will apply when considering if a payment is authorised under the lump sum rule (section 166 FA 2004)
• the tax treatment provided for by amendments made by Schedule 9 FA 2024 is ignored

In short the payment receives the tax treatment that is would have had before 6 April 2024. This means that:

• the payment is a BCE 6 — the date of the BCE is when the member became entitled to it in accordance with section 166(2)(b) FA 2004 — due to the retrospective nature of the remedy this means the same date the member became entitled to their pension, as the payment forms part of that benefit payment package
• where that BCE occurred before 6 April 2023 the payment is subject the LTA charge
• the payment reduces the amount of the member’s available LSA and LSDBA where the standard transitional calculation is used under paragraphs 125 and 126 of Schedule 9 FA 2024

Top-up lump sum paid to member on or after 6 April 2024 intended to be a serious ill-health lump sum (SIHLS)

Regulation 22 SI 2023/113 sets the conditions where a top-up payment to a serious ill-health lump sum (SIHLS) is authorised. Where those conditions are met the top-up lump sum payment is treated as a SIHLS.

The action of paragraph 130A of Schedule 9 FA 2024 together with the retrospective nature of the remedy, means that:

• the payment is a BCE 6 — the date of the BCE is when the member became entitled to it in accordance with section 166(2)(b) FA 2004 (this will be the same date that the member became entitled to the original SIHLS payment)
• where that BCE occurred before 6 April 2023 any excess above the member’s available LTA is subject the LTA charge
• the payment reduces the amount of the member’s available LSA and LSDBA in accordance with paragraphs 125 and 126 of Schedule 9 FA 2024
• if a member applies for a transitional tax-free amount certificate, the evidence they provide to the relevant scheme administrator should show both the original and top-up lump sum payments

Top-up lump sum paid on or after 6 April 2024, and after member’s death, intended to be a SIHLS

Regulation 26 SI 2023/113 sets the conditions where a top-up payment to a serious ill-health lump sum (SIHLS) is authorised. Where those conditions are met the top-up lump sum payment is treated as a SIHLS paid to the member. This means that:

• the payment is a BCE 6 — the date of the BCE is when the member became entitled to it in accordance with section 166(2)(b) FA 2004 (this will be the same date that the member became entitled to the original SIHLS payment)
• where that BCE occurred before 6 April 2023 any excess above the member’s available LTA is subject the LTA charge
• the payment reduces the amount of the member’s available LSA and LSDBA in accordance with paragraphs 125 and 126 of Schedule 9 FA 2024
• if the member’s personal representative applies for a transitional tax-free amount certificate, the evidence they provide to the relevant scheme administrator should show both the original and top-up lump sum payments

Top-up lump sum paid to member on or after 6 April 2024 intended to be a trivial commutation lump sum (TCLS) or small pots lump sum

Regulation 20 SI 2023/113 sets the conditions where a top-up payment to a TCLS is authorised. Where those conditions are met the top-up lump sum payment is treated as a trivial commutation lump sum.

Top-up payments for small pots lump sum should be able to be authorised under the conditions set by Regulation 12 SI 2009/1171.

Becoming entitled to, and payment of, these lump sums is not a BCE, and it will not be an RBCE. The payments do not use up LTA, LSA or LSDBA.

Top-up lump sum paid on or after 6 April 2024, and after member’s death, intended to be a TCLS or small pots lump sum

Regulation 25 SI 2023/113 sets the conditions where a top-up payment to a TCLS paid following the member’s death is authorised. Where those conditions are met the top-up lump sum payment is treated as a TCLS.

Regulation 9 SI 2023/912 sets the conditions where a top-up payment to a small pots lump sum paid following the member’s death is authorised. Where those conditions are met the top-up lump sum payment is treated as a TCLS for the purposes of Part 9 of ITEPA 2003.

Becoming entitled to, and payment of, these lump sums is not a BCE, and it will not be an RBCE. The payments do not use up LTA, LSA or LSDBA.

Top-up to a defined benefits lump sum death benefit (DBLSDB)

Regulation 31 SI 2023/113 makes provision for the taxation of top-up payments to a defined benefits lump sum death benefit (DBLSDB). The intention was that the top-up payment would get the same tax treatment as the original DBLSDB.

The amendments to FA 2004 and ITEPA 2003 made by Schedule 9 FA 2024 mean that regulation 31 will no longer operate as intended. Where a top-up payment is made on or after 6 April 2024 more than 2 years after either the member’s death, or when the scheme could reasonably be aware of the member’s death (the relevant 2 year period), the payment will be taxable.

Regulations will be made so that the top-up DBLSDB payments made outside the relevant 2 year period will receive similar tax treatment to the original DBLSDB payment. HMRC will be consulting with public service pension scheme administrators about this.

Tax treatment of benefit over payments and impact on allowances

As a result of the immediate benefit choice made by, or on behalf of, the member the amount of their scheme pension or lump sum entitlement may go down. Similarly, the amount of death benefit payable to a beneficiary may reduce. Schemes can require members, or beneficiaries, to repay the overpaid benefits. Repaying overpaid benefits may change the amount of LTA used.

Overpaid scheme pension

The amount of the BCE 2 in respect of that pension will be based on the annual amount of the reduced scheme pension. This is the amount that should be used in the standard transitional calculation of the member’s LSA and LSDBA under paragraphs 125 and 126 of Schedule 9 FA 2024. The fact that regulation 28 SI 2023/113 authorises the overpaid scheme pension does not alter the amount of LTA used under BCE 2.

Overpaid pension commencement lump sum (PCLS)

Where a member has received an overpaid PCLS, the amount of their LTA used up (and so available LSA and LSDBA) will depend on whether the member repays any overpaid PCLS.

Under regulation 30 SI 2023/113 when the member has completed repaying the required amount to the scheme, the amount of the BCE 6 is reduced by the amount of the overpaid lump sum.

If the member has not repaid the scheme in full at the time of the first RBCE, the overpaid PCLS is included in the amount of LTA used up, and in the paragraph 125 and 126 (Schedule 9 FA 2024) calculation of the member’s available LSA and LSDBA.

If the member has repaid the lump sum in full at the time of the first RBCE, do not include the overpaid amount in the calculation of the member’s available LSA and LSDBA.

If a member has applied for and received a transitional tax-free amount certificate, and then later repays the lump sum in full, this will mean that the information on that certificate is no longer correct.

Overpaid DBLSDB

If a beneficiary has received too much DBLSDB as a result of the remedy, the scheme can ask the beneficiary for the overpaid lump sum to be repaid.

If an RBCE occurs in respect of a deceased member who had remediable service, how their available LSDBA is calculated depends on if the overpaid DBLSDB has been repaid.

Under regulation 15 SI 2023/912 when the beneficiary completes repaying the scheme, the amount of the BCE 7 is reduced by the amount of the overpaid DBLSDB.

If the RBCE occurs before the beneficiary has repaid all the lump sum to the scheme, the amount of the overpaid DBLSDB is included in the calculation of the member’s available LSDBA in accordance with paragraph 126 Schedule 9 FA 2024.

If the first RBCE occurs after the beneficiary has repaid the lump sum in full, do not include the overpaid amount in the calculation of the member’s available LSDBA.

Member action on receipt of a revised BCE or RBCE certificate

Members should give a copy of a revised BCE certificate to any scheme under which they had a BCE or RBCE after the public service pension scheme BCE.

The other scheme will need to reconsider the status of the payments made by their scheme and the LTA usage (or LSA and LSDBA usage for benefits crystallised on or after 6 April 2024). For example, if benefits provided under a public service scheme increase this could mean that part or all a lump sum paid by the later scheme that was intended to be a PCLS may no longer be a PCLS.

Transitional tax-free amount — all scheme types

A transitional tax-free amount certificate cannot be issued after an RBCE has occurred.

A member’s choice under the remedy can change the amount of the benefit they have already become entitled to. Where the amount of the member’s benefit entitlement has increased, the public service pension scheme will then need to make payments to top up the member’s benefits to the correct level. 

Top-up payments made to the member on or after 6 April 2024 are not RBCEs. The member does not need to apply for a transitional tax-free amount certificate before these payments are made.

However, a public service pension scheme member with remediable service who crystallised benefits before 6 April 2024 and who wants a transitional tax-free amount certificate will need to apply before:

• further benefits that include lump sums are crystallised under the scheme, for example a partial retiree takes full retirement after 5 April 2024
• benefits, that include lump sums, are put into payment under another registered pension scheme,

Becoming entitled to these benefits may be RBCEs.

Because of the retrospective nature of the public service pensions remedy, scheme administrators may need to make further enquiries before issuing a certificate in respect of a public service pension scheme member who has remediable service. This is to ensure that they have been given complete evidence and that the certificate gives the correct figures.

Where the evidence provided indicates that benefits under a public service pension scheme that is a Chapter 1 or Chapter 2 scheme started payment in tax years 2015 to 2016 onwards, scheme administrators will need to know:

• if the member is impacted by the public service pension remedy
• if the member is affected by the remedy, whether the evidence provided shows the correct position after the member has made their choice under the remedy — scheme administrators cannot rely on the fact that an impacted member first took benefits on or after 1 October 2023 to have been given the correct benefits under the remedy

If an impacted member has not been offered a choice, or their choice has not yet been implemented, scheme administrators cannot be certain that the evidence provided shows the correct amount of pre-6 April 2024 lump sums.

The legacy pension schemes in respect of police and firefighters are unusual in that they allow for lump sum to be paid at retirement that are more than the maximum PCLS. Members of these schemes often take the maximum sum, part of which will be an unauthorised payment and so should not be included in the calculation of available LSA and LSDBA.

Where a PCLS has been overpaid this must be included in the lump sum transitional tax-free amount and the lump sum and death benefit transitional tax-free amount, unless the member has repaid the scheme in full. 

Paying only part of the amount the scheme requires to be repaid will not reduce the amount of the lump sum transitional tax-free amount and the lump sum and death benefit transitional tax-free amount.

If the overpaid amount is later repaid in full to the scheme this will reduce the lump sum transitional tax-free amount and the lump sum and death benefit transitional tax-free amount. The figures shown on the transitional tax-free amount certificate will now be incorrect; they will overstate the member’s position. If there has been an RBCE in respect of the member the certificate should be revoked. 

Where a DBLSB has been overpaid this must be included in the lump sum and death benefit transitional tax-free amount, unless the beneficiary has repaid the scheme in full.

Paying only part of the amount the scheme requires to repaid will not reduce the amount of the lump sum and death benefit transitional tax-free amount.

If the overpaid amount is later repaid in full to the scheme this will reduce the lump sum and death benefit transitional tax-free amount. The figure shown on the transitional tax-free lump sum will now be incorrect; it will overstate the member’s position.

Where a member is given a transitional tax-free amount certificate, they should give a copy of that certificate to the schemes they have taken benefits from. This will enable the scheme administrator of those schemes to provide annual RBCE statement on the basis of lump sum actually paid from that scheme rather than on the basis of LTA used under that scheme. When taking further benefits at a later date, it will also help scheme administrators if the information members provide before putting benefits into payment is in one form rather than a mixture of LSA, LSDBA and LTA information.

Fixed protection 2016 and individual protection 2016 application deadlines

Paragraph 93(5) Schedule 9 FA 2024 has the effect of putting a deadline of 5 April 2025 for making an application for either fixed protection 2016 or individual protection 2016.

Regulations will be made to extend the deadline for making an application until 5 April 2027 for individuals who have remediable service.

If as a result of the remedy the value of a member’s total pension rights on 5 April 2016 is more than £1 million they can apply for protection. 

Once protection has been applied for, and granted, the amount of the protection can be amended. For example, a deferred choice member had total pension rights of £1.05 million (based on legacy accrual) and received individual protection 2016 on that basis. In 2029 that member makes a new scheme benefits election which increases that value of their pension rights as at 5 April 2016 to £1.1 million. The member can tell HMRC about the revised values of their pension rights and their individual protection 2016 will be changed accordingly.

Paying the LTA charge

Where a choice by, or in respect of a member, retrospectively increases the member’s benefit entitlement a new or increased LTA charge may arise. Scheme administrators should report any increases.

Although the LTA has been abolished from 6 April 2024, scheme administrators will still be able to report new or increased LTA charges using the Accounting for Tax (AFT) return.

Pension remedies for MPs, MSs and members of the Northern Ireland Legislative Assembly — tax treatment of annual allowance and lifetime allowance

Background

As part of reforms to the Parliamentary Contributory Pension Fund (PCPF) in 2015 to 2016 and the Members of the Senedd Pension Scheme (the Senedd scheme) in 2016 to 2017, MPs and MSs were moved from final salary benefits to Career Average Revalued Earnings (CARE) benefits.

The change from the final salary to the CARE benefits included protections which followed similar principles to the wider 2015 public service pension reforms, which were subsequently found at the Court of Appeal to be discriminatory on the basis of age. The government introduced legislation to remedy this discrimination in public service pension schemes in 2022. The Independent Parliamentary Standards Authority (IPSA) and the Senedd Commission intend to implement a similar remedy to the government’s remedy to the discrimination in the reforms to public service pension schemes.

As a result of the remedy being implemented by IPSA and Senedd, the government will introduce regulations in the 2024 to 2025 tax year to provide for the tax consequences relating to a member’s pension benefits where a member makes a choice for different benefits. The tax regulations will apply only to members who make a choice for different benefits and will apply from the 6 April 2024. Where a member retains their existing benefits, they will undertake the standard tax calculations (as normal).

The following guidance will provide members with the required information on what will be included within the tax regulations prior to making a decision.

MPs remedy

From 6th April 2024, the government understand that IPSA intend to provide all MPs with the option of which arrangement they would like their benefits to be calculated under during the remedy period (8 May 2015 to 31 March 2023).

Unlike the mainstream remedy, the immediate choice for MPs and their personal representatives is not retrospective. This means there is no change in the annual allowance (AA) or lifetime allowance (LTA) position for the tax years falling within the remedy period. Instead, if a member chooses to change their benefits for the remedy period from CARE to final salary or vice versa, their benefit entitlement will change in the tax year they make their choice (2024 to 2025). This will impact on the members AA position and in specific circumstances what would have been their LTA position in 2024 to 2025.

MSs remedy

From 6 April 2024, the government understand the Senedd Commission will provide MSs who were under 55 on 1 April 2012 the option of how they would like their benefits to be calculated in respect of the remedy period (6 May 2015 2016 to 6 May 2021). This immediate choice for MSs and their personal representatives is not retrospective, which also means there is no change in the AA or LTA position for tax years falling within the remedy period. Instead, if a member chooses to change their benefits for the remedy period from CARE to final salary or vice versa, their benefit entitlement will change in the tax year they make their choice (2024 to 2025). This will impact on the members AA position and in specific circumstances what would have been their LTA position in 2024 to 2025.

Northern Ireland and Scotland

Members of the Legislative Assembly of Northern Ireland also underwent pension reforms in 2016, which included transitional protections. Further detail on the tax treatments for these members will be provided once their remedy has been put in place.

The Scottish Parliamentary Pension Scheme did not undergo any changes similar to the 2015 and 2016 reforms in other parliamentary pension schemes and therefore no remedy is required in relation to this scheme.

Annual allowance (AA)

The members AA position for the remedy years will not change. Where a member chooses a different form of benefits the tax regulations will modify how their pension input amount (PIA) under the scheme for the year they make their choice (2024 to 2025) is calculated where the finals salary and CARE benefits are held under separate arrangements. This may give rise to a tax charge that would not have arisen if their chosen benefits had arisen in each of the relevant tax years.

The PCPF contains a CARE and final salary section which are separate arrangements. A member’s PIA for a tax year is the total of the PIAs for each pension arrangement that individual belongs to. Where the final salary and CARE benefits are held under separate arrangements, this means the PIA must be calculated separately for the final salary arrangement and the CARE arrangement. Both arrangements are classified as defined benefits arrangements. PTM053301 explains how to calculate the PIA for a defined benefits arrangement. Broadly the PIA is the difference between the value of the member’s pension rights under the arrangement at the end of the year (the closing value) and the value of those rights at the start of the year (the opening value). A PIA for an arrangement cannot be less than £0.

Where a member makes a choice for different benefits during the remedy period and they have a large increase in pension savings in their chosen arrangement, they will have a large decrease in the other pension arrangement. Where the final salary and CARE pension arrangements are separate, a decrease in the value of pension rights in one arrangement cannot offset the one-off increase in the value of rights under the other arrangement. This can lead to a tax charge that would not occur if the increase for each tax year had arisen in the related year.

Where a member makes a choice for different pension benefits which are held under a separate arrangement, the calculation of the member’s PIA for those arrangements for the year they make their choice will be through a 2-stage process. These changes will only apply in relation to the tax year the member makes their choice. The normal rules for calculating the PIA will apply in later tax years.

There will also be special rules applying to pensioner members who choose a different form of benefits.

Step 1 — calculate the PIA for ordinary benefit accrual in the year (MPs only)

The closing value for both the final salary and CARE arrangements is calculated on the basis that the member’s choice has been implemented. 

To reflect the fact that the basis of calculating the member’s pension entitlement is changing, the opening value will be calculated as if the member’s choice had been implemented. This revised opening value will be used to calculate the member’s PIA for the arrangement using the normal methodology. For the avoidance of doubt, this includes uprating each opening value by the relevant consumer price index rate as usual.

For example, if a member of PCPF moved from CARE benefits to final salary benefits in respect of the remedy period (ending 31 March 2023), the PIA calculations for 2024 to 2025 would be:

• CARE opening value based on pension rights as at 5 April 2024 (this includes rights accrued from 1 April 2023 to 5 April 2024)
• CARE closing value based on pension rights as at 5 April 2025 (this includes rights accrued from 1 April 2023 to 5 April 2025)
• final salary opening value based on pension rights as at 5 April 2024 (this includes rights accrued from entry into this arrangement to 5 April 2024)
• final salary closing value based on pension rights as at 5 April 2025 (this includes rights accrued from entry into this arrangement to 5 April 2025)

As the opening and closing values will reflect the PIA had the member always been within their chosen arrangement, it ensures the PIA measures the pension savings all members have built up in the year, and prevents a one off spike in the PIA as a result of the scheme’s remedy. This also ensures the member’s opening value under each arrangement for the next tax year to reflect the correct position, to enable the standard method of calculating the member’s PIA going forward.

Step 2 — increase in PIA as a result of the member’s choice (MPs only)

Where a member’s choice leads to an overall decrease in benefits under the scheme, the member’s PIA within step 2 will be ‘nil’. 

Where a member’s choice leads to an overall increase in benefits (across both their CARE and final salary arrangements), the increase in benefits will be brought into the member’s PIA for the year the member makes their choice. This is to ensure that the increase in benefits which members receive as a result of their options exercise is within the AA system.

This is found by:

The total of the value of the member’s pension rights under the CARE and final salary arrangements at the end of the year in which the member makes their choice calculated on the basis of the member’s choice.

Less

The total of the value of the member’s pension rights under the CARE and final salary arrangements at the end of the year in which the member makes their choice calculated on the basis that the member did not choose to change benefits.

This amount is then multiplied by the usual factor of 16 to give the PIA for step 2.

For example, an MP had been accruing benefits under the final salary arrangement at a rate of 1/40 pensionable pay. That MP was moved to the CARE section in 2015. In 2024 to 2025 under the PCPF options exercise that MP chooses to have final salary benefits in respect of the remedy period.

The calculation is based around the following:

Value of the member’s CARE pension for the period 1 April 2023 to 5 April 2025 (for example, £3,500pa), plus the value of the member’s final salary pension as at 5 April 2025 based on pensionable service to 31 March 2023 (for example, £26,000pa)

Less

Value of the member’s CARE pension for the period 8 May 2015 to 5 April 2025 (say £15,000pa), plus the value of the member’s final salary pension as at 5 April 2025 based on pensionable service to 7 May 2015 (say £10,000pa)

So (£3,500 + £26,000) – (£15,000 + £10,000) = £4,500

The PIA for step 2 is £72,000 (£4,500 × 16)

Retired members (MPs and MSs)

Under the normal application of the tax rules if an individual has fully retired, they do not have a PIA under that scheme. As the remedy for PCPF and the Senedd scheme is not retrospective, any increase in benefits as a result of the members choice will not be measured against the AA. This could result in these members being in an advantageous position.

Tax regulations will provide that if a pensioner member chooses a different form of benefits, they will have a PIA under the scheme for the tax year that they make their choice. This will be calculated in accordance with step 2.

The availability of carry forward to use against this PIA will also be restricted.

So, if a retired member’s choice results in them having an AA charge, they will be required to report and pay this through Self Assessment, as is normal when an AA charge arises.

Member’s PIA for the scheme as a result of choosing different benefits

The member’s PIA under the scheme is the total of the PIA for each arrangement. There may be other arrangements under the scheme, for example PCPF has separate arrangement for pension ministerial service.

Where an active or deferred MP chooses a different form of benefits in the tax year that choice takes effect, the member’s PIA under the scheme will be the total of:

• step 1 PIA for CARE arrangement
• step 1 PIA for final salary arrangement
• step 2 PIA
• the PIA for every other pension arrangement the individual has under the scheme

Where a retired MP or MS chooses a different form of benefits, in the tax year that choice takes effect the member’s PIA under the scheme will be the total of step 2.

For active and deferred MSs, their total PIA will be calculated as normal where their pension rights are held under a single arrangement.

Pension saving statements (PSS)

The normal rules for providing a PSS either automatically, or upon the request of the member, will apply. As for any other tax year, the member will be able to use the information provided along with their PIAs from other pension schemes they are a member of, to calculate their AA position. If the member has an AA charge, they should report this as normal through Self Assessment. Members will also be able to utilise the scheme pays process as normal.

Lifetime allowance (LTA) (MPs and MSs)

As the remedy is not retrospective, the entitlement to increased benefits will arise following the abolition of the LTA. This means some members not being subject to a tax charge which they would have been subject to if the increase in benefits had been retrospective.

To prevent these members receiving a tax windfall, a special one-off tax charge will apply in respect of any member who makes a choice for higher benefits and had a BCE in the period 6 April 2020 to 5 April 2023. The person subject to the tax charge will be the scheme administrator. The amount of the tax charge will be 25% of the value of the increase in pension rights (calculated in accordance with the rules in place before 6 April 2024). The scheme administrator will adjust the member’s benefits to account for that tax charge, in the same way a member’s benefits would be adjusted as the result of the scheme administrator paying an LTA charge.

The members LTA position within the remedy years will not change. If the amount of this tax charge is more than the amount of the LTA charge the member would have been subject to if the LTA charge had still been in place, HMRC’s understanding is that member can apply to the scheme for a redress payment.