Guidance

Lifetime allowance guidance newsletter: February 2024

Updated 27 February 2024

Frequently asked questions

Lump Sums and Lump Sum Death Benefits

Question 1 — what is the tax treatment of lump sum death benefits, paid in excess of the deceased member’s available allowance, where the payment is to non-qualifying persons?

If the lump sum is paid within the relevant two-year period, then the excess over the deceased member’s available lump sum and death benefit allowance is taxed as pension income. For non-qualifying persons who are not subject to the higher or additional rates of income tax, this will be basic rate tax (or the trust rate if applicable).

If the lump sum is not paid before the end of the relevant two-year period, then the whole of the lump sum is subject to the special lump sum death benefit charge.

This two-year rule does not apply to pension protection lump sum death benefits or annuity protection lump sum death benefits, consistent with their treatment before 6 April 2024.

Question 2 — how do pensions schemes determine the order in which relevant benefit crystallisation events have occurred?

It will be up to the member to decide on the order of their relevant benefit crystallisation events, for instance where more than one pension commencement lump sum or uncrystallised funds lump sum occur on the same day. We are working to provide early guidance in this area.

Question 3 — will the pension commencement excess lump sum (PCELS) be payable by occupational pension schemes?

Yes. We will be bringing forward changes to The Occupational Pension Schemes (Assignment, Forfeiture and Bankruptcy) Regulations 1997 to ensure that a PCELS is payable by occupational pension schemes.

Question 4 — given the payment of a trivial lump sum still requires available lifetime allowance, will this be amended?

Yes. We will be bringing forward consequential changes to Article 23C of The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (SI 2006/572) to ensure that trivial lump sums can still be paid after 6 April 2024. Rather than requiring available lifetime allowance, members will require available lump sum allowance in order to be paid a trivial lump sum.

Reporting Requirements

Question 5 — does the one-off reporting exercise required by paragraph 130 of Finance Bill 2023-24 include individuals who are no longer members of the pension scheme?

No. This reporting requirement only applies to individuals who still have uncrystallised rights remaining within the pension scheme. See the separate article in this newsletter on paragraph 130 of Finance Bill 2023-24 for further information.

Question 6 — When providing relevant benefit crystallisation event (RBCE) statements, can schemes choose to include actual amounts to two decimal places?

Yes. Pension Schemes Newsletter 155 outlined that pension schemes should detail the member’s allowances used to the nearest pound, rounded down. If your systems allow you to provide members with statements showing the actual amounts of their allowances used (to two decimal places and therefore including pence) then you may do so. Where you need to round the figures reported on RBCE statements, you should round down to the nearest pound.

Question 7 — do pension scheme administrators need to include a separate statement for the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) or, if the numbers are the same, can they just provide one figure?

If the amount of LSA and LSDBA used is the same, you may report just one figure on the member’s relevant benefit crystallisation event (RBCE) statement. However, the statement or accompanying communications should make clear that there are two allowances, and that the member is receiving one figure because the amount they have used of each allowance is the same.

If the amount of LSA and LSDBA used are different, you must report both figures on the member’s RBCE statement and set these out separately.

Question 8 — will there be a requirement to issue annual relevant benefit crystallisation (RBCE) statements to members over the age of 75?

Yes. Although currently there is no requirement for pension scheme administrators to issue benefit crystallisation event (BCE) statements after the member reaches age 75 (because there will be no automatic test against the LSA or LSDBA when the member reaches age 75) it will be necessary to provide annual RBCE statements beyond age 75. We will be bringing forward legislative changes to regulations 14, 16 and 17 of The Registered Pension Schemes (Provision of Information) Regulations 2006 SI 2006/567 to provide for this requirement.

Overseas Transfer Allowance

Question 9 — paragraph 54 of Finance Bill 2023-24 provides that an individual’s overseas transfer allowance (OTA) ‘is an amount equal to the member’s lump sum and death benefit allowance’. Does this mean that the OTA is their lump sum and death benefit allowance as defined at new section 637R of Income Tax (Earnings and Pensions) Act (ITEPA) 2003, or their available lump sum and death benefit allowance as provided for at new section 637S of ITEPA 2003?

A member’s initial OTA is an amount equal to their initial lump sum and death benefit allowance as defined at new section 637R of ITEPA 2003 and will therefore be £1,073,100 unless the individual holds a valid protection. The availability of their lump sum and death benefit allowance will not affect the availability of their OTA.

Question 10 — part 6 of Finance Bill 2023-24 does not include transitional arrangements for an individual’s overseas transfer allowance (OTA). Will this be reduced by the value of any pension benefits crystallised prior to 6 April 2024?

Yes. The government will bring forward the necessary transitional arrangements for the OTA via regulations, and this legislation will be effective from 6 April 2024. We will communicate the detail of these changes as soon as possible.

Protections and Enhancement Factors

Question 11 — where an individual has scheme-specific lump sum protection and takes a commencement lump sum, how does this reduce their available lump sum allowance and lump sum and death benefit allowance?

The individual’s lump sum allowance will be reduced by an amount equal to their applicable amount in accordance with paragraphs 2A to 2D of Schedule 29 to Finance Act 2004, which is their applicable amount as it would be if the individual did not hold a protection. This ensures that an individual’s lump sum allowance is only reduced by the standard 25%. As a result, their scheme-specific lump sum protection will not limit the value of any pension commencement lump sum that they can later take from another scheme.

The relevant legislation can be found at paragraph 87 of Finance Bill 2023-24, which amends paragraph 34 of Schedule 36 to Finance Act 2004.

Question 12 — do the changes to the calculations for enhancement factors, and their move to Schedule 36 of Finance Act 2004 mean that previous certificates need to be reissued?

No. Certificates that have already been issued will continue to apply. Pension scheme administrators do not need to recalculate enhancement factors, or reissue certificates. The government will bring forward further transitional arrangements, via regulations, to ensure that individuals who have applied for an enhancement factor before 6 April 2024 and who are relying on a certificate issued prior to this date can continue to rely on this certificate.

Question 13 — where does the legislation provide that applications for enhancement factors will be closed from April 2025?

This is provided for through the amendments to the Amendments of the Registered Pension Schemes (Enhanced Lifetime Allowance) Regulations 2006 (SI 2006/131) at paragraph 94 of Finance Bill 2023-24. Paragraphs 94(10)(3), 94(11)(d), 94(12)(e) provide that the closing date for these enhancement factors is the earlier of the relevant date and 5 April 2025.

Transitional Arrangements

Question 14 — what is the definition of ‘Lifetime Allowance’ and ‘Benefit Crystallisation Events’ for the purposes of Part 6 of Finance Bill 2023-24 now that these have been omitted from Finance Act 2004?

These definitions have been removed from Finance Act 2004, however they retain the same definition as prior to their repeal. This is because paragraph 129(6) sets out that ‘a reference in any of paragraphs 125 to 128 or this paragraph to a provision of FA 2004 is to that provision as it had effect immediately before 6 April 2024’.

Question 15 — can individuals who have crystallised benefits through a BCE 5, 5B, or 8 apply for a transitional tax-free amount certificate which reflects the fact they have not received any tax-free amounts at these BCEs?

Yes. Individuals who have crystallised benefits at a BCE 5, 5B, or BCE 8, and who therefore believe that they have taken less than 25% of their lifetime allowance used at 6 April 2024 as tax-free amounts, can apply for a transitional tax-free amount certificate. Paragraph 129 of Finance Bill 2023-24 sets out that, to apply for a transitional tax-free amount certificate, individuals must provide complete evidence of each lump sum or lump sum death benefit (if any) that the individual became entitled to before 6 April 2024. As a result, the legislation does not preclude those who have crystallised benefits and not taken any tax-free amounts from applying.

Question 16 — if an individual has taken a pension commencement lump sum with scheme-specific lump sum protection prior to 6 April 2024, should the pension scheme adjust downwards the amount taken for the purposes of the transitional arrangements?

No. There will be no requirement for schemes to adjust down the amount of lump sums taken tax-free where the individual holds scheme-specific lump sum protection. Individuals with such protections will automatically have the benefit of their protection reflected in the standard calculation, as this requires that pension schemes deduct only 25% of the individual’s lifetime allowance previously-used amount from their lump sum allowance. Likewise, only 25% will be deducted from their lump sum and death benefit allowance unless the individual has received a serious ill-health lump sum. We therefore do not expect that these individuals will need to apply for a transitional tax-free amount certificate.

Question 17 — under the standard transitional calculations (where the individual does not apply for a transitional tax-free amount certificate), what is the correct position where the member received a serious-ill health lump sum whilst under the age of 75 or where the member died under age 75 and their beneficiaries received a lump sum death benefit?

In these circumstances, paragraph 126(4) provides that 100% of the individual’s lifetime allowance previously used amount should be deducted from their available lump sum and death benefit allowance. It is not the case that only the appropriate percentage of their lifetime allowance previously used amount that was taken as a serious ill-health lump sum or lump sum death benefit should be deducted from their available allowance at the 100% rate. The previously used amount is not apportioned and the 25% rate does not apply.

Question 18 — will stand-alone lump sums be included in an individual’s transitional tax-free amount?

Yes. We will be bringing forward changes, via regulations, to paragraph 129(1) of Finance Bill 2023-24 to ensure that any lump sums paid as a stand-alone lump sum before 6 April 2024, as far as that payment was free from income tax, is included in the lump sum transitional tax-free amount. 

Transitional tax-free amount certificates

We’ve received a lot of feedback on the application of transitional tax-free amount certificates and the following information provides further clarification.

Who should apply

The majority of members should not need to apply for a transitional tax-free amount certificate. The standard calculation will accurately reflect the tax-free lump sums they have taken prior to 6 April 2024. We understand there are concerns that a higher volume of members than expected will apply for these certificates. HMRC guidance will make clear that the process outlined at paragraph 127 of Finance Bill 2023-24 should only be followed by members who have used less of their available lifetime allowance as tax-free lump sums than under the standard calculation — for instance they did not take their maximum pension commencement lump sum. We will publish guidance for members on GOV.UK following Royal Assent of the Finance Bill 2023-24, rather than from 6 April 2024.

Providing members with the opportunity to apply for transitional tax-free amount certificates is however necessary to ensure that they are not put in a worse tax position due to the standard transitional arrangements. Although no one will be put in a worse tax position by the standard transitional arrangements than they would have been under the lifetime allowance system.

Members should not apply for a transitional tax-free amount certificate where they believe that this might result in lower available allowances than under the standard transitional calculation. This is because the legislation does not allow for members to apply in order to compare the results under each process. If a transitional tax-free amount certificate is granted to a member, this provides for their new available allowances because it has put them in the correct tax position. There is no opportunity to revert to the standard calculation once a transitional tax-free certificate has been granted.

Complete evidence

The onus is on members to provide the evidence of their actual tax-free amounts used prior to 6 April 2024. This evidence constitutes part of the application. The legislation does not prescribe exactly what constitutes complete evidence because this would overly restrict what a scheme can and cannot accept. Complete evidence must therefore always account for the total amount of lifetime allowance used in order that schemes can determine what portion of those pension benefits were taken as tax-free lump sums. However, evidence will need to be considered on a case-by-case basis. HMRC guidance will provide examples of what might be considered due diligence and accepted as complete evidence, for instance, we would expect members to provide documentation such as financial records, bank statements, or BCE statements.

What certificates should contain

The legislation sets out what information a transitional certificate should include at paragraph 127(5) of Finance Bill 2023-24. However, we have not prescribed the format a certificate should take to give freedom to produce these in ways compatible with your systems and processes.

Certificates should not be amended if they are found to be inaccurate. Paragraph 127(6) of Finance Bill 2023-24 only allows for a certificate to be cancelled. A member or legal personal representative can reapply with accurate evidence should they wish to. This is to ensure that the complete evidence is reviewed each time a certificate is applied for.

Positions for individuals with pre-commencement pensions

Individuals whose only ‘pensions in payment’ are pre-commencement pensions and have had no BCEs between April 2006 and April 2024, are not within scope for applying for a transitional tax-free amount certificate.

Under the lifetime allowance system, individuals who have a pre-commencement pension in payment have an adjustment to their available lifetime allowance. The changes at paragraph 77 of Finance Bill 2023-24 (which amend paragraph 20 of Schedule 36 to Finance Act 2004) will mean that the existing adjustment, based on the assumption that these individuals have received 25% of their pre-commencement benefits as tax-free amounts, will continue to apply.

Individuals who have a pre-commencement pension in payment, but they have had one or more BCEs between 6 April 2006 and 6 April 2024, will be eligible to apply for a transitional tax-free amount certificate.

We are aware that the current legislation at paragraph 129(1) and (2) of Finance Bill 2023-24 does not provide for pre-commencement lump sums, and have received queries on what tax-free amounts a certificate should show for members with a pre-commencement pension who have not received a pension commencement lump sum or an uncrystallised funds pension lump sum. We will bring forward changes to this legislation, via regulations, to include tax free benefits taken pre-5 April 2006. This will allow for members who need to go through the certification process to provide evidence of lump sums (if any) which were taken before the commencement of the lifetime allowance and where there was no charge to income tax.

How members should apply for their certificate

Pension Schemes Newsletter 155 originally stated that members must apply to the pension scheme from which they receive their first relevant RBCE. This error was corrected in an update to the newsletter on 7 February 2024, as the legislation at paragraph 127(2) allows for individuals to apply to any pension scheme of which they are a member.

We expect individuals to apply to the scheme from which the payment which constitutes their first RBCE is being paid post April 2024. This will be covered in guidance on GOV.UK. However, we understand that it may be more applicable for some individuals to apply to an alternative scheme – for instance if they have crystallised most of their pension benefits under another scheme, or if they took their ‘less than maximum tax-free lump sums’ from another scheme.

Penalties for inaccurate certificates issued by a pensions scheme

Where a certificate is found to inaccurately reflect an individual’s lump sum or lump sum and death benefit transitional tax-free amount, the certificate should be cancelled by the scheme administrator. This is set out at paragraph 127(6) of Finance Bill 2023-24. Members may then be liable for any additional tax due, should their available allowances now be lesser than their certificate stated.

Where a scheme receives inaccurate information from members, it will not be penalised for the production of incorrect transitional tax-free amount certificates, unless it is found that the pension scheme has acted fraudulently or negligently.

Paragraph 21 of Finance Bill 2023-24 therefore amends the existing penalties at section 264 of Finance Act 2004. This provides for a penalty of £3,000 where an individual fraudulently or negligently makes a false statement, or pension scheme administrator assists in providing a statement they know to be inaccurate.

Why individuals have to apply before their first RBCE

Individuals must apply for a transitional tax-free amount certificate before their first RBCE because this is the first point at which pension schemes will need to establish what an individual’s available allowances are. If an individual were able to apply at subsequent RBCEs, and their application is accepted, then they may have received the wrong tax treatment for lump sums or lump sum death benefit paid at any prior RBCE.

Reporting required by paragraph 130

Paragraph 130 provides for a statement to be sent to certain members who would not otherwise receive one in the tax year 2024 to 2025. We have received several questions around who this one-off reporting provision applies to and what the statement should include.

This statement must be issued to either:

• a member who does not have an actual entitlement to be paid a pension
• a legal personal representative of a member who has died but did not have an actual entitlement to be paid a pension at the date of their death

This statement is not for an individual who is no longer a member of the pension scheme, for instance because they have taken all their benefits as an uncrystallised funds pension lump sum or transferred all their rights to a QROPS. The statement only applies to those who still have uncrystallised rights in that pension scheme.

It must include the percentage of the members lifetime allowance used immediately before 6 April 2024 and it must be issued by 5 April 2025. It does not need to include the default transitional amount of lump sum allowance or lump sum death benefit allowance used.

We will not prescribe format for this statement, giving you the flexibility to produce these in a format compatible with your systems and processes.

Once this one-off statement has been issued, the pension scheme administrator will not need to issue further statements until an RBCE occurs. When an RBCE occurs, the statement issued will need to include the amount of lump sum allowance or lump sum and death benefit allowance used by that RBCE.

Annual statements

As confirmed in Pension Schemes Newsletter 155, pension scheme administrators can continue to use the P60 statement to report an individual’s allowances used. This newsletter confirmed that any statements relating to the tax year 2024 to 2025 onwards should show an individual’s lump sum allowance and lump sum and death benefit allowance used, but that statements issued in 2024 relating to the 2023 to 2024 tax year should still refer to the lifetime allowance. This is because the lifetime allowance remained in legislation for the tax year 2023 to 2024.

We are aware that some pension schemes are already working to update their systems in readiness for the abolition of the lifetime allowance and expected that any statements produced from 6 April 2024 would need to be in relation to the new allowances and not the lifetime allowance. We are also aware that schemes were planning to send out member communications with P60s to explain the new allowances and that the lifetime allowance has been abolished. If schemes have already adapted their systems and processes, they may therefore include on such statements the amount of lump sum allowance and lump sum death benefit allowance available instead of the percentage of lifetime allowance used. Unless the member has a transitional tax-free amount certificate in force, the annual statement which reports lump sum allowance and lump sum death benefit allowance usage should be based on the default transitional arrangements.

We can confirm that there is no requirement to report members’ lifetime allowance percentage used on annual statements issued in respect of benefits paid in the 2024 to 2025 tax year onwards. 

Event 24

We have received several questions about new event number 24. This new event will be added to the Event Report from the tax year 2024 to 2025.

As confirmed in Pension Schemes Newsletter 155, we will be amending the provision at paragraph 106 of Finance Bill 2023-24 so that event number 24 only applies where either:

• a lump sum (other than a lump sum death benefit) paid exceeds an individual’s available allowances (or would have done had the individual not been relying on a protection or an enhancement)
• a lump sum death benefit paid exceeds an amount equal to the individual’s lump sum and death benefit allowance of £1,073,100 as set out in section 637R (this reporting requirement does not require any assessment of an individual’s available lump sum and death benefit allowance)

We will also amend the provision to make it clear that where the payment is a lump sum death benefit, the pension scheme administrator does not need to confirm that any tax due has been paid. The tax position will be dealt with by the legal personal representative.

Paragraph 106 will therefore provide for the following information to be included in the Event Report:

• the member’s name and national insurance number
• the nature and amount of the lump sum or lump sum death benefit (the RBCE)
• the date of the RBCE
• confirmation of whether the lump sum or lump sum death benefit results in the member’s allowances being exceeded
• where the lump sum results in a member’s allowances being exceeded, confirmation that any amount of tax due on the excess has been paid
• each lifetime allowance protection or enhancement type and reference number (if applicable)

Pension commencement excess lump sum

In Pension Schemes Newsletter 155 we explained that we had noted the concerns raised since the publication of Finance Bill 2023-24 regarding the operation of the pension commencement excess lump sum (PCELS). The relevant legislation can be found at paragraph 26 of Schedule 9 to Finance Bill 2023-24.

We can now confirm that the ‘permitted maximum’ for the PCELS will be removed from legislation. This amendment will mean that a lump sum will not be tested against a member’s remaining lump sum and death benefit allowance to determine whether it can be paid as a PCELS.

We can also confirm that a member will have to have exhausted their lump sum allowance or their lump sum and death benefit allowance to be eligible for a PCELS. This change will ensure that, provided all other conditions are met, a PCELS can be paid to members who have not exhausted their lump sum allowance but have exhausted their lump sum and death benefit allowance because they have become entitled to a serious ill-health lump sum.

These changes will ensure the PCELS operates as intended from 6 April 2024. The policy intention was to ensure that individuals who have crystallised benefits above £1,073,100 could continue to commute (more of) their pension as a lump sum on commencement. Our intent was not to directly replicate the lifetime allowance excess lump sum. As a result, a PCELS will remain payable only where an individual becomes entitled to it in connection with becoming entitled to a relevant pension.

The necessary changes will be made through regulations introduced ahead of 6 April 2024. We will provide further guidance and worked examples on the PCELS as soon as possible. Thank you to industry representatives for their engagement on this issue.

Real Time Information

We have received several queries on the changes to PAYE regulations and what pension scheme administrators now need to report via Real Time Information (RTI). Pension Schemes Newsletter 155 confirmed that there will be changes to PAYE regulations and these changes will require pension scheme administrators to report any relevant lump sum which is subject to tax, in whole or in part, through RTI. The changes will also make it mandatory to report the taxable and non-taxable elements of any lump sums reported. There will therefore be new data items for both the PCELS and the stand-alone lump sum.

However, until further notice, you should continue to follow the guidance published as part of the Lifetime allowance guidance newsletter — March 2023. You should also report the payment of a PCELS as you would have reported the payment of a lifetime allowance excess lump sum, as set out under the guidance published in March.  Systems changes are expected to be ready for April 2025 and we will provide further guidance on the PAYE changes and RTI reporting in future newsletters.

Future communications

The Lifetime Allowance Working Group on transitional arrangements took place on 8 February. Thank you to all attendees for their engagement.

The Lifetime Allowance Working Group on reporting requirements will take place on 14 February at 2pm to 3:30pm. Invites have already been circulated, however you can still sign-up by emailing policypensions@hmrc.gov.uk and putting ‘lifetime allowance Working Group’ in the subject heading.

Future pension schemes newsletters will contain further guidance on the lifetime allowance Abolition, including:

• the changes to enhanced protection
• the operation of lump sum and death benefit allowance enhancement factors
• the impact of stand-alone lump sums and lump sums taken under scheme-specific lump sum protection on an individual’s allowances
• the impact on allowances where individuals have a protected pension age of below 50 and take pension benefits before normal minimum pension age

The next pension scheme newsletter is due to be published the week commencing 19 February.

Please do continue to send any questions, or requests for additional guidance on areas not yet covered, to policypensions@hmrc.gov.uk.