As we approach 2024, there is a lot of speculation from certain newspapers regarding potential pension legislation changes. While many publications are circulating similar stories, it’s essential to note that the truth behind these claims remains uncertain. We can only advise on the facts and current legislation surrounding pension legislation changes 2024, steering clear of press speculation.
Overview of Pension Legislation Changes 2024
We do know, under the LTA (Lifetime Allowance) abolition, that LSA (tax-free cash) and LSDBA (tax-free lump sum death benefits pre-75) are fixed indefinitely. Fiscal drag (the post-inflation value of the benefit in real terms) will therefore come into play with these figures, bringing in additional tax revenue as time passes due to the pension legislation changes 2024.
Pressures on public sector schemes in particular have led to the increase in the Annual Allowance, Tapered Annual Allowance, and Money Purchase Annual Allowance to reduce the tax burden on NHS staff and to stop the exodus of older workers and senior medical staff.
These adjustments are significant components of the pension legislation changes 2024. The Kings Speech does not talk about the removal/reduction of tax-free cash, altering IHT status of pensions, moving to a single rate of tax relief, or re-introducing the LTA. Further details are in the attached which covers all the proposals for all the proposed Bills within the King’s Speech.
The Kings Speech does not talk about removal/reduction of tax free cash, altering IHT status of pensions, moving to a single rate of tax relief or re-introducing the LTA. Further details are in the attached which covers all the proposals etc for all the proposed Bills within the King’s Speech
Below is a summary of the measures that will be introduced in relation to the proposed Pension Schemes Bill
Impact of the Pension Schemes Bill on Retirement Savings
- Pension legislation changes 2024 aim to prevent people from losing track of their pension pots through the automatic consolidation of Defined Contribution individual deferred small pension pots.
- Ensuring all members are saving into pension schemes delivering value through the Value for Money framework. Introducing a standardised test that trust based defined contribution schemes will need to meet to demonstrate they deliver value. The FCA will ensure the framework is applied to contract schemes and therefore consistently across the whole pension market.
- Requiring Occupational Pension schemes to offer a retirement income solution or range of solutions, including default investment options, to their members.
- Consolidating the Defined Benefit (DB) market through commercial Superfunds, resulting in greater protection for members in closed legacy Defined Benefit schemes from the risk of losing part of their pension if their employer becomes insolvent.
- Reaffirming the Pensions Ombudsman (TPO) as a competent court, removing the need for pension schemes to apply to the courts to enforce TPO decisions in relation to the recovery of overpayments. Re-establishing the Ombudsman powers to those of a competent court will alleviate pressures and cost for courts, schemes, and members, ensuring recovery costs are kept to a minimum.
- Amending the Special Rules for End of Life (Pension Protection Fund and Financial Assistance Scheme (FAS)) extending the definition of ‘terminal illness’, allowing eligible members within the Pension Protection Fund and the Financial Assistance Scheme to receive a lump sum payment at an earlier stage.
Political Context and Speculation
Below are some detailed thoughts the Head of Pension Policy at Quilter, Jon Greer, released to the press a few weeks back, which highlight the difficulties in bringing in some of the ‘speculated’ changes:
Since Starmer misspoke and said that the tax-free cash rules were coming to an end and that he wouldn’t look to renew them, the Labour party has confirmed that the ability to withdraw 25% tax-free is a permanent feature of the tax system and that there are no plans to change it.
The idea that Labour would scrap the 25% tax-free cash on pensions is extremely unlikely, given that the party has confirmed there are no plans to change this feature. Any such discussions are speculative and do not reflect the current reality under the pension legislation changes 2024. The IFS, in their ‘blueprint for a better tax treatment of pensions’ noted that any changes to tax-free lump sums would likely have to be accompanied by transitional arrangements.
This means that if there were any changes in this area (which Labour has said there are no plans for), they are only ever likely to apply for new savings going forward, and what you have accumulated thus far would be protected. Whenever there are tax rule changes on pensions, they are accompanied by transitional protections for rights already accrued.
This means that if there were any changes in this area—something Labour has stated they do not plan for—those changes would probably only apply to new savings going forward. Importantly, what you have accumulated thus far would be protected. Typically, when there are tax rule changes concerning pensions, they are accompanied by transitional protections for rights already accrued.
However, there will be people who are concerned by such rumours and decide to take their tax-free cash lump sum through fear rather than logically on facts as part of a considered plan, we would urge against that. Not only does this bring the money into your estate for inheritance tax purposes but once it’s done you can’t put it back in. Therefore, making decisions on ‘ifs and maybes’ with what’s likely your most important pot of money is not sensible.
The same must be said for any other rumoured changes to the pension tax landscape. You must plan your finances on the rules that are in front of you today and your specific finances. Pensions are a tax efficient vehicle that allow you to save for your retirement and it is unlikely that a Labour government is going make sweeping changes that change the crux of this without a reasonable period of consultation.
Flat rate of tax relief on pension contributions
As we consider the implications of the pension legislation changes 2024, there are rumours that the marginal rate of relief that applies to pension contributions could be changed to flat rate.
If this were to occur we would expect there to be a considerable period of consultation and then any implementation would be measured in years rather than weeks. The main reason for this is that flat rate relief is very complex to deliver.
The majority of occupational pensions schemes (and all public sector ones) provide tax relief on a net pay basis whereby contributions are deducted before tax. All such schemes would have to register with HRMC for relief at source and amend their administration. Other practical implications of moving to a flat rate include:
- Tax relief on employer contributions would come under the spot light. This is essential for flat rate to work since the majority of contributions are made by employers. Higher rate tax payers could continue to get higher rate relief by the back door using salary sacrifice arrangements. Abolition of salary sacrifice would affect many schemes, since under the arrangement employees effectively sacrifice an element of their salary equivalent to the employee contribution in exchange for an employer contribution. Sacrificing your gross pay for an equivalent employer contribution gives you full marginal relief. Without amendment to salary sacrifice rules or abolition for salary sacrifice for pensions it would be easy for higher rate tax payers to side step the flat rate relief and obtain full higher rate.
- Defined benefit pension scheme design may have to change since the employee contribution to fund the same level of DB pension, for higher rate tax payers, would have to increase.
- There are other DB complexities; on ongoing accrual valuation for employer contributions, how these would be valued for annual allowance purposes and the likelihood of retrospective tax calculations for every DB member. This would impact the public sector more than any other employer. The unions would insist on consultations before any changes were made.
- They could duck the DB issue entirely and just bring in flat rate for DC but that would seem rather unfair, and bring calls from public sector pensions to be changed fundamentally.
As the pension legislation changes 2024 continue to unfold, we remain dedicated to providing you with accurate and timely updates on this important topic. Speculation can often cloud the facts, so we will ensure our readers are informed as new developments arise.
If you are looking for expert financial advice on pension planning, please contact us today. We are here to assist you in making informed decisions that will secure your financial future.
