Proposed Lifetime Allowance coverage modifications might topic “many more” individuals to taxation, an skilled warns.

Buried in HMRC’s new policy paper outlining the proposed measures to abolish the Lifetime Allowance is a proposal to make beneficiaries pay revenue tax on inherited pensions, even when the policyholder dies earlier than 75.

At current, individuals can go on unused pensions to family members freed from revenue tax in the event that they die earlier than age 75. If an individual dies over the age of 75, solely then will beneficiaries be taxed at their marginal fee.

But this July 18th coverage paper, entitled “Abolition of the Lifetime Allowance”, states: “Authorised lump sums and lump sum death benefits will be tested against a new threshold, set at the same level as the present Lifetime Allowance, £1,073,100.”

People is not going to pay tax the place lump sums don't exceed this stage, nonetheless, any lump sums paid above this stage can be taxed on the individual or beneficiaries’ marginal fee.

Jon Greer, head of retirement coverage at Quilter, commented: “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 lifetime allowance from April 2024.

“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.”

The proposed coverage modifications will influence those that obtain lump sum funds or dying advantages from registered pension schemes, in addition to those that have or intend to use for Lifetime Allowance (LTA) or lump sum protections.

On the face of it, Mr Greer mentioned: “The changes put forward would subject many more people to taxation impacting beneficiaries of members who die pre-age 75 who left uncrystallised (unused) funds in their Defined Contribution (DC) pension pot.”

Mr Greer famous that presently, beneficiaries can select to obtain an revenue both by designating to drawdown or buying a beneficiary annuity and obtain that revenue tax-free.”

If proposals are to go forward, Mr Greer mentioned: “The Government wants those beneficiaries to pay marginal rate tax from the next tax year.

“This will impact any beneficiary who chooses beneficiary drawdown or annuity regardless of the size of the pension fund the member had accrued during their lifetime. It’s a sea change in tax treatment and could have a large political impact ahead of an election one would have thought.”

Commenting in response to the considerations, a Government spokesperson advised Pensions Age journal: “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.”

What is the Lifetime Allowance?

During Chancellor Jeremy Hunt’s Spring Statement in March 2023, it was introduced the Lifetime Allowance (LA) can be absolutely abolished by the 2024/25 tax 12 months.

The Lifetime Allowance (LTA) seeks to cap the scale of the fund that accrues throughout an individual’s lifetime and for most individuals, is £1,073,100 within the tax 12 months 2023/24. In earlier years, individuals would have paid a Lifetime Allowance cost on any pension financial savings over this quantity.

From April 6, 2023, that cost modified to zero %, with the Lifetime Allowance set to be abolished utterly in April 2024.