Over a long career I have lived through several big changes in pensions.
From the 1997 guaranteed minimum pension changes, the introduction of stakeholder pensions, pensions simplification right through to pension freedoms, each initiative shook up the pensions world.
Looking back these changes seem to have come about every seven years, so we were probably due a new one, and that came in the spring Budget.
The abolishment of lifetime allowance charges, which came into effect in April, and the promised removal of the LTA next tax year should have simplified the pensions environment. And to a large extent it has done.
Many of the queries I have received from financial advisers in recent years have centred on the age 75 benefit crystallisation event, and whether their client would be better taking drawdown income to avoid a LTA charge or running the risk of a higher inheritance tax bill. That quandary disappeared overnight.
But that does not mean the new rules are simple. A case I saw this week about a client who had used 100 per cent of their LTA and died with several resulting death benefit payouts sent a nasty reminder that complexities still riddle the pension tax rules.
The finance (no. 2) bill – soon to be legislation – has got rid of the LTA charge, but more tax rule changes are coming.
The chancellor promised to abolish the LTA completely. HMRC now has the unenviable task of putting that promise into practice in next year’s finance bill.
This summer it has to draft up the new rules that will eradicate mention of the LTA. This is no simple task.
The LTA was one of the dual planks pensions simplification was built on in 2006 (the other being the check on contributions – the annual allowance). To remove it requires a Jenga-style move that could result in the tower of pension tax rules crashing down.
We know the new rules will be predicated on the principle that someone can only have a limited amount of tax-free cash – starting off at £268,275 (25 per cent of the current LTA).
So presumably this will be a new limit or allowance. But beyond that we know little of what HMRC is planning or what mandate they have been given by the politicians.
How will this new limit work? Will there be a disconnect between taking income and taking tax-free cash – so clients could take all their cash from one scheme, and all their income from another?
The signs are LTA protection is still going to be part of the new world as it will allow those with protected higher tax-free cash amounts to keep them. But will those protection rules change in any way?
