Too many unanswered questions on the Lifetime Allowance axe are causing disruption for retirees, according to a new report from pension consultants LCP.

The Lifetime Allowance was formally abolished with effect from 6 April but there are still legislative changes needed to fully implement the new pensions tax regime.

According to pensions consultancy LCP, the gap between the Government’s policy intentions and the legislation are currently so large that, “HMRC has been forced to recommend that some people delay retirement” where possible to avoid being caught by incorrectly drafted law.

Alasdair Mayes, partner at LCP said: “Despite over a hundred pages of legislation, we still do not have final legal certainty on exactly how the abolition of the Lifetime Allowance will be implemented.

"There remain far too many unanswered questions, despite the fact that the LTA officially ceased to exist several weeks ago. We appreciate that HMRC is doing its best and is having to cope with a timetable driven by policy makers, but this whole experience shows why we need stability in pensions tax legislation. It is to be hoped that pensions tax does not become a political football. 

“A worrying number of people in their late 50s and early 60s have already left the workforce and further changes to pension tax relief won’t just cause disruption to members and pension providers but also risk making the situation worse.”

Although an Act of Parliament running to more than 100 pages has been passed to implement the change, it has been found to be incomplete in some areas and not correct in others, requiring secondary legislation to rectify both.

HMRC has kept the industry updated by regular newsletters as well as workshops. It has given no indication of a firm end date by which all the necessary changes will have been made.

LCP has identified more than a dozen separate areas where HMRC is promising further changes to the rules, and these include:

• Measures to protect members with ‘scheme-specific’ protection, allowing them to take larger than normal amounts of tax-free cash when drawing their pension;
• Changes to enable members with enhanced protection to be able to transfer to a new provider and not lose this valuable protection
• Transitional rules around tax-free cash taken before the new regime was introduced and how this is to be calculated
• Additional disclosure requirements so that providers have the information necessary to be able to operate the new tax regime

HMRC first said that it intends to issue a second set of regulations changing the legislation governing the lifetime allowance abolition in March.

In the 2023 Spring Budget, Chancellor Jeremy Hunt said the Government intended to abolish the lifetime allowance altogether. Changes brought into force in April 2023 retained the lifetime allowance in the tax system but removed the lifetime allowance charge.

The Finance Act 2024 set out the main legislation for the abolition of the lifetime allowance, including an unusual clause allowing the Treasury to make subsequent changes to the primary legislation through regulation.

Under the new regime, a Lump Sum Allowance set at £268,275 is the maximum someone can take as a tax-free lump sum (unless they have protection).

A Lump Sum and Death Benefit Allowance, set at £1,073,100, incorporates both tax-free lump sums someone takes while alive and lump sums paid on death.

There is a third allowance – an overseas transfer allowance – also set at £1,073,100, measuring the value of pension benefits transferred to qualifying overseas pension schemes.