Industry experts have raised concerns over the potentially “detrimental outcome” of the government's plans to remove the lifetime allowance (LTA), after the draft legislation was shared for the first time.

The government previously announced plans to abolish the LTA as part of the 2023 Spring Budget, alongside changes to the money purchase annual allowance, the tapered annual allowance, and the tapered annual allowance.

However, The Investing and Saving Alliance (Tisa) argued that whilst this decision was expected to simplify pensions administration and make "an already complicated process for members a little easier to navigate", the LTA "has gone only in name and is being replaced with a ‘permitted maximum’ limit”.

“Lump sums which exceed this limit will now be subject to marginal rate tax rather than a lifetime allowance charge, however this is not going to impact the majority of savers whose pensions fall well below that limit,” Tisa head of retirement, Renny Biggins, stated.

“However, what is really disappointing in this draft legislation is that the abolition of the LTA will now impact smaller pension pots – pots and individuals which were never previously caught by the LTA."

In particular, Biggins explained that beneficiaries inheriting an uncrystallised pension pot from someone who died under age 75 and electing a beneficiary drawdown or annuity will now have their pension income taxed at their marginal rate, irrespective of the size of the pension pot on death.

"“The removal of these LTA tests means that in order to ensure these scenarios generate a tax revenue, all drawdown and annuity beneficiaries will be subject to tax on their pension income," he explained.

"Few would have predicted a detrimental outcome of this nature when the announcement was made."

These concerns were shared by LCP partner, Steve Webb, who argued that the changes threaten to “backtrack” on the ability to inherit pension pots tax-free.

Webb stated: “For the past eight years, people have known that if a loved one died under the age of 75 they could inherit an untouched pension pot free of all tax. The money could sit in a drawdown account, being invested and growing, and would be a source of tax-free income whenever needed.

“This tax advantage risks being abolished by next April if these new proposals are implemented. It would be totally unacceptable to make such a big change ‘through the back door’.

"If ministers plan to remove this pension tax break they should announce their plans publicly and have them properly debated."

This was echoed by Quilter head of retirement policy, Jon Greer, who noted that "on face value, it appears quite significant changes to the tax treatment of beneficiary pensions were put forward in a relatively underhanded way under the guise of removing the LTA from April 2024".

He continued: "A single sentence at the end of a policy statement appears a rather odd way to announce a sea change in such a material aspect of the pensions tax regime.

"It begs the question of whether the publication of this alongside the legislation was even intentional or whether it was a result of huge time constraints to release information by legislation-day (L-day). Regardless, this is something that needs clarification sooner rather than later.

"It would be odd for this to be how government chooses to announce such a big change, especially with a general election looming; it’s hardly a vote winner - quite the opposite you would have thought.

"There is no doubt that HMRC has been under pressure to get information out, but this is not actually a written policy of the Treasury or based on anything formally announced so it feels premature.

"It’s a sea change in tax treatment and could have a large political impact ahead of an election one would have thought."

In addition to the potential political impact, Biggins argued that changes such as this that bring additional groups of typically lower earners into the pensions tax framework "will only serve to further damage the reputation and fairness of our pensions system”.

“It is universally accepted that constant pension changes increase complexity and is a barrier to consumer engagement and understanding -something as an industry we are trying so hard to combat," he stated.

However, commenting in response to the concerns, a government spokesperson said: “We want to keep 15,000 experienced people in work to help grow our economy and clear backlogs, such as seniors in the NHS who had told us that pensions tax was disincentivising them from working, which is why we have abolished the LTA.

“We look forward to working with stakeholders over the coming weeks to help us craft the legislation which will ensure that our historical pensions tax cut delivers the right results for savers and the economy.”

Furthermore, in the latest Pension Schemes Newsletter, HMRC said that it "welcomes responses" from all stakeholders on the areas discussed in the policy paper, including but not limited to the approach to: crystallised lump sum death benefits, excess pension commencement lump sums, small lump sums, winding up lump sums, and trivial commutation lump sums.

It also clarified that while the draft legislation provides several places where HMRC have regulation making powers to specify how scheme benefits are to be valued or similar, it is not the government's intention to change the approach that schemes currently take to valuing benefits.

"We would welcome views from schemes on where in the legislation they consider this detail would be best placed," it stated.

Further detail is also expected to follow in the full regulations, although Sackers warned that "the 6 April 2024 timeframe is beginning to look a little on the tight side" given the work needed.

"Removing the LTA and its knock-on effects will inevitably bring with it a requirement to update scheme administration processes," the firm stated.

"There will also be an onus on schemes to keep careful records and to check with members to assess what lump sums may have been taken previously which would count for the purposes of the new allowances."

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