HMRC has suggested that some members may wish to delay transferring their pension or taking benefits until amending legislation on the abolition of the lifetime allowance (LTA) is effective, prompting further concern from industry experts.

The Finance Act 2024 delivered an amended pensions tax regime, effective from tomorrow (6 April 2024), in which the LTA on most pension and lump sum benefits is replaced by two new allowances on most lump sum benefits.

However, industry experts warned at the time that this was a "rushed job with errors and omissions coming to light, resulting in HMRC having to now engage in a patch and mend job through regulations that are promised".

HMRC has already published new regulations to address errors and omissions around the removal of the LTA in the Finance Act 2024, with the latest newsletter confirming that further minor technical changes will be made through a second set of regulations.

According to HMRC, these regulations will be made “shortly” and, when introduced, will be effective from 6 April 2024.

Whilst "important" changes, HMRC said that they will not affect the vast majority of pension saves, as they relate primarily to specific protections or to individuals who plan to transfer their pension savings to a qualifying recognised overseas pension scheme (QROPS).

However, HMRC clarified that schemes should ensure that members are aware of the need for further legislative changes, confirming that, as a result, members may need to wait until the regulations are in place before taking or transferring certain benefits.

In particular, HMRC said that it will be bringing 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, it therefore said that members with enhanced protection may wish to delay transferring to a new provider.

It also confirmed that it will bring forward legislation to address concerns raised around enhanced protection or primary protection and lump sums rights for those taking a pension commencement lump sum over £375,000.

In the meantime, HMRC confirmed that members may take a PCLS up to £375,000, and forgo their protected entitlement as any amount subsequently paid would not meet the conditions to be a PCLS, or delay to the payment of their PCLS in order that they can take their full entitlement.

Further legislative changes are also expected to confirm that the payment of a lump sum and death benefits allowance (LSDBA) from funds which crystallised prior to 6 April 2024 should be entirely tax-free.

Given this, HMRC said that, until the amendments are effective, legal 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.

However, AJ Bell director of public policy, Tom Selby, said the changes have been “rushed”, warning that “there are still issues that will not be resolved by the time the new rules are in place on 6 April”.

“This is far from ideal and means financial advisers, savers and providers will find the switch to the new regime this year hugely challenging," he stated.

"This clearly increases the risk of things going wrong and runs counter to the FCA's Consumer Duty, which requires firms to avoid foreseeable harm. This potential source of harm was obvious for all to see and yet the government has ploughed ahead regardless.”

These concerns were echoed by Nucleus Financial technical services director, Andrew Tully, who argued that "to suggest at such a late stage that people should delay taking benefits or transferring shows how poorly these changes have been implemented”.

“We are only a few days away from implementation so some advisers and customers will have made plans and committed to use funds,” he added.

“Now HMRC is effectively delaying payments to customers or stopping them taking certain actions whilst it fixes incorrect legislation. It’s a bit of a shambles.”

Employers have also been urged to ensure they are prepared for the changes, as Quantum Advisory argued that employers should evaluate Excepted Group Life Assurance arrangements in the lead up to the abolition of the LTA, amid concerns many do not have a full understanding of the potential tax charges going forward.

Quantum Advisory principal consultant, Graham Yearsley, explained that while many employers have implemented Excepted Group Life Assurance arrangements for their employees, which, as they are not registered pension schemes, have become very popular with high earning employees as they are not tested against the current LTA.

However, he pointed out that whilst lump sum death in service benefits will no longer be tested against the LTA, members of a Registered pension scheme from 6 April 2024 will be tested against the new Lump sum & Death Benefits Allowance (LSDBA).

“As the LSDBA will be subject to the deduction of relevant benefit crystallisation events, of which an authorised lump sum death benefit is one such event, any excess death in service lump sum above the new LSDBA will be taxed at the recipient’s marginal tax rate which could reach 45 per cent. This will make a big difference to both employer and employee,” he stated.

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