The Pensions (Abolition of the Lifetime Allowance Charge etc) Regulations 2024 came into force on 6 April 2024. Safe to say that what appeared to be the simple removal of the lifetime allowance has proved to be anything but when reading and applying these regulations.
Trustees and advisers alike are awaiting clarification on a number of aspects and struggling with the practical application of the new requirements.
In a number of newsletters, the latest in March and April 2024, HM Revenue & Customs (HMRC) promised clarity with some technical changes to be made in a second set of regulations. While we wait, trustees and advisers are left to work out what to do when members die, and their death benefits become payable.
If a member dies in service, a priority for employers and trustees is to quickly provide financial support to those close to the member who died. That is the purpose of the lump sum death benefit.
In most cases, those left behind have lost a sizeable part of the household income. Financial worries about the cost of a funeral, mortgage or rent, and other bills only add to the distress of bereavement.
The new lump sum death benefit allowance
For registered pension schemes and registered group life arrangements, the immediate impact of the new regulations is the introduction of the lump sum death benefit allowance.
The standard amount of this lump sum is £1,073,100 – this was the lifetime allowance up to 5 April 2024. There are other complexities, but broadly this will cap the tax-free part of a lump sum death benefit, just as the lifetime allowance did.
There is no provision in the current regulations for the lump sum death benefit allowance to be indexed each year, and so the impact of a static restriction will increase over time.
For most people, the lump sum death benefit allowance is unlikely to have a material impact on the immediate lump sum death benefit for their loved ones where individuals have average salaries or income.
However, this is still complex and other restrictions do still apply. So, to ensure the tax-free element, the member who died must have been under age 75 at date of death, the lump sum must be paid within two years from date of death (or trustee knowledge of the member’s death) and now the lump sum death benefit allowance must be applied.
Excepted group life arrangements
There are individuals who could incur a tax liability if: (i) their lump sum death benefit exceeds the lump sum death benefit allowance; and (ii) they are in a registered pension scheme or registered group life arrangement. These are mainly high earners or those who have a large lump sum because of the multiple of salary covered.
For many who might have been affected, their employer has already established or joined an excepted life arrangement. This was to avoid their employees’ lump sum death benefits being subject to the former lifetime allowance.
Excepted life arrangements are set up under trust but not registered with HMRC, and so are not subject to the lump sum death benefit allowance – just as they were not subject to the lifetime allowance.
When the abolition of the lifetime allowance was announced, many of us thought that would be the end of excepted life arrangements, together with the ever-present concerns about triggering inheritance tax on the 10-year trust anniversary.
Little did we know how complex the regulations abolishing the lifetime allowance would be! The Labour Party also previously announced they would reverse the abolition, though this seems less likely now that the new regulations are in force.
Where does that leave us?
The best way to maximise a lump sum death benefit paid under trust is to ensure it is tax efficient. For now, trustees paying death benefits under registered pension schemes and group life trusts must work through the complexity of the new regulations, apply the lump sum death benefit allowance where required, and await further clarity.
Until there is more transparency on how the new regulations work, any move to wind up excepted life trusts would be premature and we should continue to live with them, despite their quirks.
Christina Bowyer is a partner at Pinsent Masons.
