The available LSA where pension benefits have already been taken
Introduction
This briefing sets out how to calculate an individual’s available lump sum allowance when they have accessed some of their pensions against the lifetime allowance between 6 April 2006 and 5 April 2024.
Core considerations
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Individuals who accessed some of their pensions or turned 75 between 6 April 2006 and 5 April 2024, will have used a percentage of their lifetime allowance.
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The percentage of lifetime allowance used is converted to a monetary amount and this is reduced from the lump sum allowance.
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The ‘lifetime allowance previously used amount’ is calculated as if a benefit crystallisation event occurred immediately before 6 April 2024.
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The calculation for those with primary protection and enhanced protection is different depending on whether they also have protected tax free cash.
Contents
- Calculating the lifetime allowance previously used amount
- No transitional protections
- Fixed and individual protections
- Enhanced protection without tax-free cash protection
- Enhanced protection with tax-free cash protection
- Primary protection without tax-free cash protection
- Primary protection with tax-free cash protection
Calculating the lifetime allowance previously used amount
Where an individual accessed their pensions or turned 75 between 6 April 2006 and 5 April 2024, will have used a percentage of the lifetime allowance (LTA), shown in a benefit crystallisation event (BCE) certificate. If they have no further pensions to access and are unlikely to accrue further pension benefits, then it won’t be necessary to calculate their transitional position.
Where an individual takes tax free benefits at a relevant benefit crystallisation event (RBCE) and has used a percentage of the LTA, they need to calculate the ‘lifetime allowance previously used amount’ which is:
‘the amount that would have been the previously used amount for the purposes of section 219 of the Finance Act 2004 if a benefit crystallisation event had occurred immediately before 6 April 2024'.
What this means is the total percentage of the LTA someone has already used is converted to a monetary value based on their LTA immediately before 6 April 2024. For individuals without transitional protection, the standard lifetime allowance of £1,073,100 is used. Those with lifetime allowance transitional protections use an increased lifetime allowance as shown below.
Type of protection | Lifetime allowance immediately before 6 April 2024 |
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Fixed protection 2012 | £1,800,000 |
Fixed protection 2014 | £1,500,000 |
Fixed protection 2016 | £1,250,000 |
Individual protection 2014 | Confirmed on protection certificate ranging between (1,250,000 - £1,500,000) |
Individual protection 2016 | Confirmed on protection certificate ranging between (1,000,000 - £1,250,000) or £1,073,100 if higher |
The LTA percentage used is multiplied by the appropriate LTA to produce a monetary figure. From that value 25% is considered to have been paid tax free and is then deducted from the clients LSA.
For example
The following table shows how to calculate the ‘lifetime allowance previously used amount’ for different transitional protections where an individual has used 80% of their LTA. The Remaining LSA column shows the LSA for that protection minus the previously used amount.
Type of protection | Lifetime allowance previously used amount calculation |
Remaining LSA |
---|---|---|
No transitional protection | 25% x (80%x £1.0731m) = £214,620 |
£268,275 - £214,620 = £53,655 |
Fixed protection 2012 | 25% x (80%x £1.8m) = £360,000 |
£450,000 - £360,000 = £90,000 |
Fixed protection 2014 | 25% x (80%x £1.5m) = £300,000 |
£375,000 - £300,000 = £75,000 |
Fixed protection 2016 | 25% x (80%x £1.25m) = £250,000 |
£312,500 - £250,000 = £62,500 |
Individual protection 2014 (certificate confirms £1.35m) |
25% x (80%x £1.35m) = £270,000 |
£337,500 - £270,000 = £67,500 |
Individual protection 2016 (certificate confirms £1.1m) |
25% x (80%x £1.1m) = £220,000 |
£275,000 - £220,000 = £55,000 |
No transitional protections
Where an individual took benefits between 6 April 2006 and 5 April 2016, the LTA was greater than the final LTA of £1,073,100. The percentage of benefits taken during this period are essentially valued down in line with the reduction to the LTA. As such the reduction to the LSA may be less than the actual tax-free lump sums paid.
Individuals may benefit from a transitional tax-free amount certificate if they took less than 25% tax-free cash at previous BCEs.
For example
Mindy took benefits valued at £500,000 in February 2012, taking £125,000 tax-free cash, when the LTA was £1,800,000. This used up 27.77% of the lifetime allowance.
The lifetime allowance previously used amount is:
27.77% of £1,073,100 = £297,999.87
25% of £297,999.87 = £74,499.97
Mindy took £125,000 tax-free cash but only £74,499.87 is deducted from the LSA.
The available LSA = £268,275 - £74,499.87 = £193,775.15
Any benefits taken between 6 April 2016 and 5 April 2020 would have been tested against a lower lifetime allowance than the final lifetime allowance of £1,073,100. The percentage of benefits taken during this period are slightly increased in value in line with the increase in the LTA. As such, the reduction to the LSA may be more than the actual tax-free lump sums paid. If these are the only benefits taken an individual may benefit from a transitional tax-free amount certificate.
For example
Jacob took benefits valued at £500,000 in June 2017, taking £125,000 tax-free cash, when the LTA was £1,000,000. This used up 50.00% of the LTA. The lifetime allowance previously used amount is:
50% of £1,073,100 = £536,550
25% of £536,550 = £134,137.50
Jacob took £125,000 tax-free cash, but £134,137.50 is deducted from the LSA.
The available LSA = £268,275 - £134,137.50 = £134,137.50
Jacob could benefit from applying for a transitional tax-free amount certificate.
Fixed protection and Individual protection
Individuals with fixed protection have a protected LTA which remains applicable when valuing any previous BCE’s.
Those with individual protection have an individual lifetime allowance protection confirmed on their protection certificate. Previous BCE’s are valued against this lifetime allowance.
With both fixed and individual protection, an individual’s LSA will be 25% of their protected LTA. In most cases the amount of tax-free lump sums taken will match the deduction from the LSA. However, where an individual has taken benefits under the LTA before they applied for their protection, then the reduction to the LSA could be more or less than the amount of tax-free cash they received.
Individuals may benefit from a transitional tax-free amount certificate if they took less than 25% tax-free cash at previous BCEs.
Follow the calculation as set out above using the appropriate protected lifetime allowance and the percentage of LTA used.
For example
Asha took benefits valued at £500,000 in June 2006, taking £125,000 tax-free cash, when the LTA was £1,500,000. This used up 33.33% of the lifetime allowance.
She applied for Fixed Protection 2012, then later took benefits valued at £400,000 in October 2022, taking £100,000 tax-free cash, against her protected LTA of £1,800,000. This used up 22.22% of the lifetime allowance.
The lifetime allowance previously used amount is:
55.55% (33.33% + 22.22%) of £1,800,000 = £999,900
25% of £999,900 = £249,975
Asha took £225,000 tax-free cash, but £249,975 is deducted from the LSA.
Available LSA = £450,000 - £249,975 = £200,025
Asha could benefit from applying for a transitional tax-free amount certificate.
Enhanced protection without tax-free cash protection
Individuals with enhanced protection don’t follow the normal transitional rules for valuing previous BCE’s. This is because BCE certificates were issued based on the actual LTA in force at the time, but for tax free cash purposes benefits taken were revalued.
Calculating the ‘lifetime allowance previously used amount’ means the value of benefits at each BCE are adjusted to reflect the change in SLA since the date of the BCE using the following formula:
• Value crystallised x CSLA/PSLA
• CSLA is £1.5M.
• PSLA is the higher of the standard LTA when the previous BCE occurred or £1.5m.
Where benefits were taken between April 2007 and 2014 the LTA was greater than £1.5m, so the value of benefits taken during this period is valued down. The value of benefits taken since 6 April 2014 will essentially be unadjusted as £1.5m was higher than the LTA for both the current and previous values.
Each BCE should be revalued using the above approach, and then 25% of the sum of these values is then deducted from the LSA and LSDBA.
Individuals may benefit from a transitional tax-free amount certificate if they took less than 25% tax-free cash at previous BCEs.
For example
Mahmood took benefits valued at £400,000 in June 2010, taking £100,000 tax-free cash, when the LTA was £1,800,000. This used up 22.22% of the lifetime allowance.
He then took benefits valued at £300,000 in October 2022, taking £75,000 tax-free cash, against the LTA of £1,073,100. This used up 27.95% of the lifetime allowance.
Using the percentage of LTA used would mean the lifetime allowance previously used amount is:
50.17% (22.22% + 27.95%) of £1,073,100 = £538,374.27
25% of £538,374.27 = £134,593.56
Available LSA = £375,000 - £134,593.56 = £240,406.44
This approach undervalues the benefits already taken. Instead, the lifetime allowance previously used amount is calculated as follows:
The £400,000 crystallised in June 2010 is revalued: £400,000 x £1.5m / £1.8m = £333,333.33
The £300,000 crystallised in October 2022 is revalued: £300,000 x £1.5 / £1.5 = £300,000
The Lifetime allowance previously used amount is £633,333.33
25% of £633,333.33 = £158,333.33
The available LSA is £375,000 - £158,333.33 = £216,666.67
Enhanced protection with tax-free cash protection
Individuals with enhanced protection are not subject to the transitional rules valuing previous BCE’s. Instead, the tax-free rights from each pension are now capped to the tax-free amount that was available on 5 April 2023, minus any tax-free lump sums paid from that pension since that date.
Any benefits crystallised before 5 April 2023 are ignored.
It will not be possible or necessary to apply for a transitional tax-free amount certificate as the actual lump sums paid are already considered in this approach.
For example
Michelle has enhanced protection with protected tax-free cash of 20%. She has previously taken benefits valued at £1m in 2014, taking £200,000 tax-free cash, and converting £800,000 to drawdown.
On 5 April 2023 her uncrystallised benefits in a SIPP were valued at £3.2m, not including the value of the drawdown benefits. When Michelle takes her remaining benefits on 15 August 2024 the SIPP is valued at £3.6m.
The maximum tax-free cash that can be drawn is:
£3.2m x 20% = £640,000
The £200,000 tax free cash previously taken is ignored.
Primary protection without tax-free cash protection
Individuals with primary protection are not subject to the transitional calculation for previous BCE’s.
Calculating the lifetime allowance previously used amount means you have to adjust the value of benefits at each BCE to reflect the change in SLA since the date of the BCE using the following formula:
• Value crystallised x CSLA/PSLA
• CSLA is £1.5M.
• PSLA is the higher of the standard LTA when the previous BCE occurred or £1.5m.
Don’t use the percentage of LTA previously used against the standard LTA of £1,073,100 or the underpinned LTA of £1,800,000. Doing so would incorrectly value the previously taken benefits.
Where benefits were taken between April 2007 and 2014, the LTA was greater than £1.5m, so the value of benefits taken during this period is valued down. The value of benefits taken since 6 April 2014 will essentially be unadjusted as £1.5m was higher than the LTA for both the current and previous values.
Each BCE should be revalued using the above approach, and then 25% of the sum of these values is then deducted from the LSA and LSDBA.
The lifetime allowance previously used amount is capped at £375,000, so the LSDBA will not be reduced by more than this amount.
Individuals may benefit from a transitional tax-free amount certificate if they took less than 25% tax-free cash at previous BCEs.
For example
Carlos has an enhancement factor of 0.5. He crystallised benefits in January 2010. The LTA at that time was £1.75m.
£1.75m x1.5 = £2,587,500
He took benefits valued at £2,587,500 using 100% of his protected LTA.
The lifetime allowance previously used amount is calculated as:
£1.75m (100% of standard LTA) x £1.5m/£1.75m = £1.5m
25% of £1.5m = £375,000
Available LSA is £375,000 - £375,000 = £0.00
Primary protection with tax-free cash protection
Individuals with primary protection are not subject to the transitional calculation for previous BCE’s.
Instead the available LSA is equal to an individual’s protected tax-free cash (confirmed on the primary protection certificate) x 1.2, minus:
- any tax-free cash taken since 6 April 2012, and
- any tax-free cash taken between 6 April 2006 and 5 April 2012 x (£1.8M/standard LTA at the time the tax-free cash was taken)
Each lump sum therefore needs to be calculated individually and then totalled. This total is then deducted from the LSA.
It will not be possible or necessary to apply for a transitional tax-free amount certificate as the actual lump sums paid are already considered in this approach.
For example
Olivia has primary protection with a primary protection factor of 0.4, with protected tax-free cash of £480,000. Olivia took £100,000 tax-free cash in October 2009, and £150,000 tax free cash in January 2018.
The starting LSA is£480,000 x 1.2 = £576,000
The £100,000 taken in October 2009 is adjusted as follows: £100,000 x £1.8m/£1.75m = £102,857.14
The £150,000 tax-free cash taken in January 2018 is unmodified.
The total value of adjusted tax-free cash rights is £102,857.14 + £150,000 = £252,857.14
The available LSA is therefore£576,000 - £252,857.14 = £323,142.86