Financial services giant Quilter has said that the abolition of the lifetime allowance (LTA) could cause delays to pension payments on death to beneficiaries.
This is following an update from HM Revenue & Customs (HMRC) on 27 March as part of its LTA guidance newsletter.
Following the changes announced in the budget, lump sum payments from pensions on death that would currently be subject to an LTA excess charge will be replaced with income tax at the recipient’s marginal rate from 6 April 2023.
For uncrystallised funds, lump sum death benefit and defined benefits lump sum death benefit, HMRC has advised a scheme’s processes for dealing with these will now change.
Previously, a pension provider would pay-out pension death benefits without accounting for the LTA tax charge. The Legal Personal Representative (LPR), which could, for example, be the beneficiary or a solicitor, would be responsible for collating information about the payments made to beneficiaries, including any amount above the deceased member’s available lifetime allowance.
This would be disclosed to HMRC generally within 13 months of the member’s death or 30 days of the date they realised that an LTA charge applied.
From 6 April 2023, pension providers will need to contact the LPR of the deceased member before paying pension death benefits to find out how much available lifetime allowance the member has. The provider will need to tell them the type and amount of benefit it intends to pay. The LPR will then confirm to the provider how much of the payment will be subject to income tax – and where multiple payments are being made to different recipients allocate the liability.
In this way, Quilter said that HMRC is placing the onus on the LPR to determine and relay the apportionment of a tax charge to the provider, and then the provider is required to deduct the tax from the excess above the lifetime allowance prior to making the payment.
Complications
Jon Greer, head of retirement planning at Quilter, said: “This change in process from HMRC may appear innocuous, but it is highly likely to cause delays in the time it takes for beneficiaries to receive lump sums payments. This is because the pension scheme will be required to wait for the Legal Personal Representative to confirm the LTA position before it can release funds.
“It should be remembered that LPR’s are unlikely to have technical pensions knowledge and may need to seek further advice to understand what it required of them at a time when they are often vulnerable.
“They may also be dealing with multiple pension schemes, resulting in a long-winded process before they can confirm any LTA excess to multiple schemes having applied apportionment where multiple beneficiaries exist. This may be beyond the capability of some LPRs who will no doubt be seeking help, and all the time that is happening the beneficiaries are waiting for payments.
“And given that not all pension schemes hold remaining funds in cash their value could fluctuate. Consequently, the valuation could change in the time the request is made to the LPR and the point at which they reply, which could be a number of weeks after.
“In that time, it’s possible that funds could increase or decrease value meaning the tax paid by multiple beneficiaries is subject to a degree of inaccuracy where multiple payments are being made.
“While this process change appears simple, it will not benefit pension beneficiaries who, in some cases, will have to wait significantly longer to receive the money they are owed.”
