Just when the pension sector felt it could move forward, it faced a set of new Lifetime Allowance rules. In the 2023 budget, the Chancellor announced the abolition of the Lifetime Allowance (LTA). The legislation was supposed to be effective immediately, but as royal ascent wouldn’t be completed until February 2024, the pensions industry had been in flux in the interim.
Royal ascent was granted, so there will be no more LTA from the new 2024/25 tax year on the 6th of April - or so we thought.
As is often the case, the devil is in the detail, and the rule of unintended consequences, which seems ever-present when pension legislation is changed, needs to be considered.
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What has changed?
What are the new Lifetime Allowance rules, and how do they apply to international QROPS transfers? As things stand, some QROPS transfers may still be liable for LTA taxation.
The most important changes to the new legislation relate to how lump sum pension payments and lump sum death benefits will be taxed going forward. Two new acronyms have entered the lexicon – Lump Sum Death Benefit Allowance (LSDBA) and Lump Sum Allowance (LSA).
Tax free withdrawals are capped at the maximum available under the old LTA limit of £1,073,100, which equates to £268,275. Higher lump sums are allowed for those with existing LTA protection in place. This means those lucky enough to hold 2012 Fixed Protection of £1,8m can take a lump sum of up to £450,000.
The same applies to Lump Sum Death Benefits. The maximum which can be paid tax free on death before age 75 will be limited to the old LTA or the protected amount. After age 75, beneficiaries will be taxed at their marginal rate. Therefore, it is very important to ensure potential beneficiaries are aware of the regulations and options available to them.
Beneficiaries in receipt of pension death benefits after age 75 of the policyholder don’t have to take the whole amount in one go and suffer the huge tax liability this would incur. Most pension plans will allow the beneficiary to receive the payments over a period of time by triggering Drawdown, purchasing an annuity or deferring payment completely until their retirement by simply assuming ownership of the pension plan. Note that the pension company has to be informed of the option taken within two years of the plan holder’s death.
Further potential complications exist for those already in Drawdown under the old rules and wish to take further tax free withdrawals. There could be a situation where tax free amounts could be lower than previously allowed. Cue another acronym. TTFAC which is Transitional Tax Free Allowance Certificate. Essentially, this certificate can be obtained from the pension company who paid a tax free withdrawal before the new legislation became law. The detail is devilish, and every case will be different. It’s therefore necessary to take advice at that point.
HMRC has issued an update that has raised more questions than answers. The Government is currently addressing a series of anomalies and should provide clarity in the near future.
QROPS and the new Lifetime Allowance rules
QROPS transfers are a case in point. Whereas we were led to believe that QROPS transfers wouldn’t attract the LTA after the 6th of April 2024, it appears this isn’t the case. Furthermore, we’ve been introduced to another new acronym: the Overseas Transfer Allowance (OTA). This allowance applies to QROPS transfers and is limited to the old LTA of £1,073,100. Any transfers in excess of this are taxed at 25%. There are kinks in the legislation whereby someone who previously went into drawdown could be double taxed; HMRC and the Government are working on ironing out the wrinkles.
This doesn’t mean QROPS transfers are now unworkable, though. In fact, there are a number of scenarios in which they are still as effective as ever.
For example, if someone has a large pot currently of lower value than the old LTA, no OTA will apply and future growth will remain outside the OTA. If there is no immediate need to release funds from the pension, this benefit should increase as the fund grows. Death benefit taxation will then relate to a combination of the country where the QROPS is based and the individual’s tax residence. If we also consider that a new Labour Government could reintroduce the LTA, it may be best to release funds sooner rather than later.
Malta QROPS for non-UK residents who are tax resident in an EU country will therefore be subject to the inheritance and succession rules of the country where they are tax resident, which may be more beneficial than the UK.
We await clarification of the alterations that need to be made to the current legislation. The uncertainty has resulted in pension companies putting large QROPS transfers on hold until the new rules are known. As always, being fully prepared for the outcome is vital, and advice should be sought from competent and experienced pension consultants.
If you want to learn more about the new Lifetime Allowance rules, please use the form below to contact us.