(2 weeks, 2 days ago)
General CommitteesI beg to move,
That the Committee has considered the draft Pensions (Abolition of Lifetime Allowance Charge etc) (No. 3) Regulations 2024.
As always, Mrs Harris, it is a pleasure to serve under your chairmanship. I will take the Committee briefly through the background and the purpose of the draft regulations, which relate to the abolition of the pensions lifetime allowance.
The lifetime allowance was introduced to limit tax-favoured pension savings in registered pension schemes: it was the maximum amount of tax-relievable pension savings from which an individual could benefit over the course of their lifetime. At spring Budget 2023, the then Government announced that they would abolish the lifetime allowance. The Finance (No. 2) Act 2023 removed the lifetime allowance charge; this was done to incentivise those considering retirement to remain in employment, and to encourage those who had already left the workplace to return.
The Finance Act 2024 removed the other elements of the lifetime allowance from the pensions tax regime, from 6 April 2024. This was an enormous task: the entire pensions tax regime was structured around the existence of a lifetime allowance. Many other aspects of the regime, such as allowable pension and lump sum benefits, were calculated by reference to the lifetime allowance. It took over 100 pages of primary legislation to remove the lifetime allowance and replace it with other rules to make the pensions tax regime operate correctly in its absence. That included the introduction of new allowances. Additional secondary legislation was then needed to provide further administrative and technical detail.
Since the Finance Act 2024 and the regulations that followed it, His Majesty’s Revenue and Customs has continued to work with industry representatives to ensure that the legislation operates correctly. In doing so, HMRC has identified some errors that need to be corrected.
The draft regulations will amend schedule 29 to the Finance Act 2004 to facilitate the correct calculation of crystallised pension rights for the purposes of the trivial commutation lump sum. They will amend schedule 36 to the 2004 Act so that the calculation of the pension credit factor is dependent on the standard lifetime allowance at the time the rights were acquired. They will correct the calculation of the additional lump sum amount in respect of scheme-specific lump sums and will modify the availability of a member’s overseas transfer allowance where a member has a pre-commencement pension in payment. They will also amend subordinate legislation to ensure that a lump sum paid in reliance on an erroneous transitional tax-free amount certificate remains an authorised payment, with any excess subject to marginal rate taxation.
The draft regulations are necessary to ensure that pension tax legislation can operate as intended. Without them, pension scheme administrators face uncertainty, and some taxpayers could receive an unintentionally more advantageous outcome than they would have if the lifetime allowance had remained in place. I hope you are with me, Mrs Harris!
These changes will put certain members in a less advantageous position. To mitigate the impact, HMRC has engaged with the pensions industry to suggest that affected payments be delayed until the regulations are in place. Most pension providers have followed that advice.
The majority of pension scheme members have been able to access the correct benefits since the lifetime allowance abolition legislation was completed earlier this year. A very small number of individuals, mainly those with large pension pots, have been inconvenienced; in some cases they have been unable to access their benefits because of some technical flaws in the legislation. The draft regulations will correct the tax position for those individuals and will allow the pensions tax regime to operate as intended. I commend them to the Committee.
It is a pleasure to serve under your chairmanship, Mrs Harris. The Opposition support the draft regulations. I am happy that they address the technical changes needed to complete the work of abolishing the lifetime allowance.
During the pandemic, a significant number of workers aged 50 or over left the labour force. In response to that challenge, the previous Government introduced the ambitious Back to Work plan, supported by £2.5 billion in funding, alongside initiatives such as the midlife MOT and returnerships. We also abolished the lifetime allowance from April 2024. This reform is essential to ensuring that highly skilled professionals such as NHS clinicians are not disincentivised from remaining in the workforce. No one should be punished or pushed out of work for tax reasons.
We welcome the Government’s decision to continue with the previous Government’s plan for the lifetime allowance. It simplifies our tax system and incentivises experienced and productive workers to stay in the workforce for longer. I would, however, like to take a moment to reflect on the Government’s somewhat changing position on lifetime allowances. Some Members may recall that the day after the previous Government announced our plans to abolish the lifetime allowance, the then shadow Chancellor pledged:
“Labour will reverse the changes to tax-free pension allowances.”—[Official Report, 16 March 2023; Vol. 729, c. 1005.]
I am happy to see that there has been a roll-back of that decision and that we are going with the previous Government’s plans. The Opposition support that, of course, and are happy to wave it through.
I thank the Opposition spokesperson for supporting the draft regulations. The Government announced in August, through an HMRC pension schemes newsletter, that we would make the legislative changes needed to complete the abolition of the lifetime allowance. That is what we are doing in the draft regulations, which will come into force on 18 November and will have retrospective effect from 6 April 2024. We have no plans to reintroduce the lifetime allowance, but we keep all taxes under review as part of our process.
The draft regulations will conclude the work to abolish the lifetime allowance, addressing issues raised by the industry and providing certainty to pension schemes, administrators and pension savers. I hope that the Committee will join me in supporting them. I know that they are highly technical, so I thank the Committee for putting up with me talking for a long time.
Question put and agreed to.