13 April 2023
HMRC has had second thoughts following industry concerns regarding its new process, set out in its March 2023 Lifetime allowance guidance newsletter, for registered pension schemes paying two types of death benefit lump sum.
The new process arose in the context of the removal of the Lifetime allowance charge from 6 April 2023 announced in the Budget. That part of these benefits that exceeds a deceased member’s remaining Lifetime Allowance will now be subject to income tax in the hands of the recipient(s) rather than attract a 55% Lifetime allowance charge.
In an email to industry stakeholders sent on 5 April 2023 for sharing (and made public with HMRC’s permission by the Association of Consulting Actuaries), HMRC says that schemes can continue to use the process that existed prior to the Budget for defined benefits lump sum death benefits (DBLSDB) and uncrystallised funds lump sum death benefits (UFLSDB).
Under this, schemes pay out these lump sums gross of any tax. Then, if the deceased member’s Legal Personal Representative identifies a chargeable amount (ie an excess as described above), they must report this to HMRC. HMRC will then approach affected beneficiaries following the end of the tax year of payment, to raise marginal rate taxation (as opposed to an LTA charge) on this excess.
This is a very welcome and timely development as it averts what could have been a significant disruption in the payment of these death benefits as well as introducing significant delays, as we reported in Pensions Bulletin 2023/13.
For processing other lump sums that are also subject to income tax instead of a 55% LTA charge if they exceed the member’s remaining LTA (so serious ill-health lump sums and “excess of LTA” lump sums), schemes should use the process set out in the March 2023 Lifetime allowance guidance newsletter.
HMRC has published two new Plain English sets of guidance for members relating to Lifetime Allowance protections. These are written in the context of the changes arising from the Budget and drafted into the Finance Bill as reported in Pensions Bulletin 2023/13.
The first set of guidance attempts to explain how the Budget changes the higher tax-free lump sums that can be taken from registered pension schemes by those with LTA protections (several now have frozen caps on this lump sum); and the second is a reminder that there are now two sorts of the vulnerable LTA protections (Enhanced Protection and Fixed Protections) – those where a successful application was received by HMRC before 15 March 2023, and those after, and sets out how the latter set can still be lost.
Although the LTA charge has been abolished from 6 April 2023, LTA protections continue to be relevant thereafter for a host of reasons – including potentially higher scope to draw benefits as tax free cash, or to mitigate income tax on an element of some taxable lump sums as per the article above.
It is also relevant to note that the window for applying for Fixed Protection 2016 (post 15 March 2023 flavour) or Individual Protection 2016 – for those that meet the qualifications for either – is still open and would apply with retrospective effect to 6 April 2016; so a successful application could unwind an LTA charge that arose for benefit crystallisation events after 5 April 2016 and before 6 April 2023. Other Protections can now be applied for only in some very limited circumstances.