The Bill (also see the Government’s policy paper) clarifies the position in respect of several matters
Pension commencement lump sum and the new pension commencement excess lump sum
The PCLS (restricted to permitted maximum)
Amendments will be made to the Finance Act 2004 to ensure the “continued operation of permitted maximum and applicable amounts which limit the pension commencement lump sum.”
Post-6 April 2024, a PCLS will continue to be paid tax-free but also continue to be restricted by a permitted maximum, this being the lowest of: (1) an amount calculated by reference to the level of pension; (2) the available LSA; and (3) the available LSDBA. Essentially, this means the standard PCLS will still be capped at £268,275. It will continue to be the case that a lump sum exceeding the permitted maximum will not constitute a PCLS.
A new form of authorised lump sum is being created, the PCELS, which will be subject to income tax. The Bill’s explanatory notes explain that this will replace the “previous facility where pension schemes were permitted to pay a lifetime allowance excess lump sum when paying commencement lump sums”. (A LTA excess lump sum is a form of authorised lump sum payable where a member has exceeded the LTA. It will be removed as part of the LTA abolition measures.)
A PCELS must meet certain conditions including that it: (1) is paid when no LSA is available; (2); is payable in connection with a pension; (3) does “not reduce the rate of payment of any pension to which the member has become (actually) entitled, or extinguish the member’s entitlement to payment of any such pension”; and (4) it does not exceed a permitted maximum calculation based on an applicable amount relating to the pension and the available LSDBA.
These changes to the PCLS framework mean that, contrary to what was thought might be the case from a reading of the July draft legislation, there is to be no significant extension of DC pension freedoms to defined benefit (DB) members (by allowing DB members to essentially take all their benefits as a PCLS). This aligns with the Government’s commentary that it did not intend to extend pension freedoms in this way.
Small lump sums
The tax-free part of a trivial commutation lump sum, a winding up lump sum and a small lump sum will not be deducted from the new lump sum thresholds if there is threshold availability to take the sum.
DC benefits on death before age 75 (BCEs 5C and 5D)
The Government has confirmed that benefits from a DC member’s uncrystallised funds will still be able to be paid under flexi-access drawdown and through an annuity without a charge to income tax where the member dies before age 75. The Government was considering whether to impose a charge to income tax on such benefits but has decided against this.
Individuals with valid lump sum and LTA protections will maintain their rights to higher levels of tax-free lump sums and, where applicable, higher tax-free parts of lump sums subject to certain limited exceptions (for example, limiting the PCLS to the maximum that could have been provided on 5 April 2023 for those with enhanced protection with total lump sum rights on 6 April 2023 exceeding £375,000). Members with valid enhanced or fixed protection which was applied for before 15 March 2023 can accrue new benefits, join a scheme, or transfer without losing their protection.
The Bill clarifies the position in respect of non-UK pension schemes – mirroring the position for UK schemes, available LTA will no longer be needed in respect of lump sums and LSDBs.
Member payment charges will include marginal rate tax charges on lump sums and LSDBs which exceed the LSA or LSDBA where payments derive from funds that have received UK tax relief.
There will also be a new ‘overseas transfer allowance’ for transfers to qualifying recognised overseas pension schemes – this will be the equivalent of the LSDBA, the same level as applied previously.
An overseas transfer charge will apply where no exclusion is applicable (25% of transfer value) or where the transfer exceeds the available overseas transfer allowance (25% of the amount exceeding the available allowance).
There will be a new system for reporting events in relation to RBCEs which tie into the new lump sum allowances. Following an RBCE, the individual will receive a statement saying how much of the new allowances have been utilised by the event.
The Bill contains provisions for calculating the availability of the LSA and LSDBA where there has been a BCE before the new regime comes into effect and a RBCE afterwards – broadly, the reduction to be applied is based on a percentage of the member’s previously used LTA (25% except in the case of certain serious ill-health and lump sum death benefit payments relating to pre-6 April 2024). If a member has previously exceeded their LTA, no LSA or LSDBA is available.
Alternatively, a member with prior tax-free amount records can apply to a scheme for a transitional tax-free amount certificate confirming that the scheme is satisfied with an individual’s lump sum and LSDB transitional tax-free amounts.
Scheme administrators must provide a statement before the end of the tax year 2024-25 to somebody who has taken a BCE before 6 April 2024 but does not have a pension in payment before end of 2024-25 tax year.
The Government has the power until 5 April 2026 to make primary legislation through statutory instruments (secondary legislation) to cater for transitional matters.