In this article the M&G Wealth technical team consider how the various pension lifetime benefits are now considered following the changes announced in the 2023 Budget, and where further clarity is required.
The content of this page is based on the M&G Wealth technical team’s understanding of the draft legislation and other related HMRC announcements as at 20th September 2023.
Uncrystallised Funds Penson Lump Sum (UFPLS)
UFPLS will continue to be payable under the new regime though with an apparent change to their taxation.
Under the current rules an UFPLS can only be paid before 75 where there is sufficient LTA to pay the whole amount. This in turn leads to 25% of the payment being tax-free. UFPLS over 75 can be paid as long as there is at least some LTA remaining with a tax free amount of 25% of the remaining LTA. LTA abolition obviously impacts these rules.
Going forward the UFPLS rules are the same both pre and post 75. The payments are effectively unlimited but the tax free amount will be based on the members available LSA and LSDBA. The maximum will be 25% but it would appear an UFPLS can be paid with no tax free amount going forward.
UFPLS eligibility
Under the old regime an UFPLS could generally only be paid in circumstances where the tax free amount was going to be 25% which made some people ineligible for an UFPLS.
With the apparent new rules allowing tax free amounts between 0% and 25% it would appear these restrictions could be removed but they are not.
Under the new regime, like the old regime you cannot take an UFPLS:
• from a disqualifying pension credit (a pension credit paid from an ex-spouse when the pension it came from was already in payment)
• where you have Primary Protection with lump sum protection
• where you have Enhanced Protection with lump sum protection
There is also a rule added where if Primary Protection is held but without lump sum protection then an UFPLS may only be paid if 25% of it is tax free. This seems unnecessary where the tax free amounts are driven by the LSA and LSDBA. A similar provision does not apply to Enhanced Protection where no tax free cash protection applies.
Serious Ill Health Lump Sums (SIHLS)
In order to qualify for a SIHLS a registered medical practitioner has to provide written evidence that the member will live for less than 12 months and the payment extinguishes all uncrystallised rights under the arrangement. A member that can meet the two conditions can have a SIHLS at any age, this will continue into the new regime.
Like the old regime where there is a payment option with a tax free amount available then a SIHLS might not be the most appropriate option.
Protected Retirement Age (under 50)
Scheme members who had a prescribed occupation and/or a right to take benefits before the age of 50 can take retirement benefits prior to age 50.
In terms of the current regime, if you take your benefits before 50, you get a 2.5% reduction in your LTA for each complete year before normal minimum pension age. Which reduces your LTA for any future benefit crystallisation events.
Under the new regime, there is going to be a 2.5% reduction in both your lump sum allowance and lump sum and death benefit allowance if you take benefits prior to age 50. It does appear that it has no practical impact as unlike the current regime it will not reduce the LSA or LSDBA available when further benefits are taken. The allowance will just have the non taxable amount deducted.
Scheme pensions/Annuities/Drawdown
These will operate as normal in the new regime. However, in the new regime the purchase price/amount crystallising will have no limit, all the benefits will just be taxed at marginal rate.
Further clarity required
It is clear that these benefits starting post 5 April 2024 do not have any impact on allowances. A key area to be clarified is what, if any, impact these benefits in payment at 6 April 2004 and started post 5 April 2006 have on post April 2024 lump sum allowances.
Lifetime Allowance Enhancement Factors (LAEF)
The pension credit, non residence and overseas transfer LAEFs have been removed from the rules going forwards.
Under the LTA regime PCLS was calculated based on the standard LTA so those factors do not have an impact when it comes to PCLS payments, the new provisions for a LSA will work to give the same PCLS figure as before.
However, it does mean that under the new regime benefits, in particular SIHLS and lump sum death benefits, that would otherwise have been tax free as they were under the LTA may now be taxable if over the LSDBA
Further clarity required
It is unclear why HMRC would want to remove the benefit of the LAEFs with regards to the LSDBA. We await guidance on whether this was the intent or if the LAEF factors will enhance relevant members LSDBA.
