LGA response to the abolition of the lifetime allowance

The Local Government Association (LGA) has published their response (on behalf of the Local Government Pensions Committee as well) to the policy paper setting out the proposal for abolishing the Lifetime Allowance (LTA). The main comments were:

1. Whilst we are supportive of any policy that simplifies the pensions tax regime and encourages people into the workplace, we do not think the proposals will deliver this for the local authority workforce and other LGPS employers.
2. The concept of having two separate limits for lump sums will be confusing for members. This will be particularly confusing where a lump sum will count towards both limits, which will be the case for PCLS and UFPLS.
3. As a result of the changes to the LTA, the maximum lump sum amount a member can take as PCLS will be frozen at £268,275. If the Government is committed to encouraging people back into the workforce, this figure should be increased in line with the Consumer Price Index.
4. We do not understand why trivial commutation lump sums will count towards the new threshold of £1,073,100 if the policy is to limit the amount of tax-free lump sums a member can take. For a member to be entitled to a trivial commutation, the value of their total pension savings must be less than £30,000 on the nominated date and the member must have reached normal minimum pension age.
5. There is a more general problem about the information that members will be able to provide about tax-free lump sums they received in the past. Pension schemes are required to provide members with a statement telling them what percentage of the standard lifetime allowance is used up when a BCE occurs. They are not required to split this between the amount paid tax-free and the taxable amount. Nor are they required to provide a cash value, only a percentage. Members will now need to re-visit past lump sum payments to find out the amount of tax-free cash paid. Some of these payments were made 17 years ago. Pension schemes will have changed administrators and software suppliers in this time. Some schemes will no longer exist. Depending on the type of payment, some schemes may have decided that under GDPR rules they no longer need to retain information about payments made to members that extinguished their rights under the scheme.
6. The draft regulations do not cover how to value lump sums paid before 6 April 2006 for the purpose of establishing an individual’s available lump sum allowance or lump sum and death benefit allowance. Draft sections 637U(3) and 637W(3) of the ITEPA both say that the whole allowance is available “if no relevant benefit crystallisation event has occurred in relation to the individual before the current event”. The regulations in their current form ignore any pension commencement lump sum paid before 6 April 2006. A member who took a pension and lump sum at age 50 in January 2006 may have a further BCE up to age 75 in 2031. They will be in a more favourable position in terms of tax than a member who took their first pension after 5 April 2006.
7. In our view, there is insufficient time to implement such large-scale reform by 6 April 2024. Public sector pension schemes are currently in the process of implementing the McCloud remedy which is a major project taking up all available resource. Vacancy rates in the LGPS are around 10 per cent on average. Setting up new processes to accommodate the need to track previously untracked payments is therefore very unwelcome.

This article highlights key concerns about the proposed policy shared by many in the financial services sector and we will of course be on hand to demystify the final rules once the technical provisions are released.

The information in the article is correct as at 13/10/2023.