Neil Evans, Senior Technical Manager
In a significant change to the pension landscape, the lifetime allowance has been removed from 6 April 2024. Given how integrated the lifetime allowance was to pension planning there are a lot of changes to consider.
It’s important to understand what this means for clients saving for retirement and those accessing their pensions.
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Key points
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The lifetime allowance has been removed and replaced with the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA).
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Clients with transitional protection will qualify for enhanced allowances.
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Someone’s LSA or LSDBA will be reduced as a result of any benefit crystallisation events (BCEs) prior to 6 April 2024.
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Clients that never took the maximum tax-free lump sums that were available, may benefit from applying for a transitional tax-free amount certificate.
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Further HMRC legislation is expected to clarify how certain transitional protections will operate, including scheme specific tax-free cash and stand-alone lump sums.
Please note the latest HMRC newsletter, highlights that further legislation is required to support:
- enhanced protection and protected lump sum rights.
- lump sums from funds crystallised before 6 April 2024.
- scheme specific lump sum protection.
HMRC suggest that affected clients may wish to consider delaying taking benefits until the legislation is corrected.
In the first of a two-part series we look at:
- The LSA and the LSDBA that replace the lifetime allowance.
- what the new allowances mean for you and your clients.
- and where you and your clients should consider taking action.
The second part of the series will look at changes to death benefits, taxation and planning wealth transfer.
The lump sum allowance
The LSA caps tax-free lump sums a client can take to £268,275 unless they have transitional protection or qualify for a serious ill health lump sum.
The maximum tax-free lump sum available from any pension is still limited, in most cases, to the lower of 25% of the pension value being taken, the available LSA or the available LSDBA.
The lump sum and death benefit allowance
The LSDBA caps the tax-free lump sums a person can access during their life and the tax-free lump sum benefits paid on their death to £1,073,100. The LSDBA may be more than this if a client has transitional protection.
Lifetime allowance transitional protections
Any clients with lifetime allowance transitional protection will instead have the following:
| Lump sum and death benefit allowance | Lump sum allowance | |
|---|---|---|
| Fixed Protection 2012 | £1.8m | £450,000 |
| Fixed Protection 2014 | £1.5m | £375,000 |
| Fixed Protection 2016 | £1.25m | £312,500 |
| Individual Protection |
Equal to the individual protection | 25% of the individual protection |
|
Enhanced Protection |
The value of an individual’s uncrystallised rights on 5 April 2024 |
£375,000 |
| Enhanced Protection (with lump sum protection) |
The value of an individual’s uncrystallised rights on 5 April 2024 | The value of tax free lump sum available from each pension on 5 April 2023 |
| Primary Protection (without lump sum protection) |
£1.8m multiplied by their primary protection factor | £375,000 |
| Primary protection (with lump sum protection) |
£1.8m multiplied by their primary protection factor |
Value of the individual’s lump protection x 1.2 |
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Planning tip
It is still possible to apply for Fixed Protection 2016 and Individual Protection 2016 before the application deadline of 5 April 2025. Clients that qualify could secure an increased LSA and LSDBA.
Clients have been able to contribute to their pensions since 6 April 2023 without losing their transitional protection. For those with enhanced protection this won’t have increased their tax-free lump sum rights, but any contributions prior to 6 April 2024 will have increased their lump sum and death benefit allowance. For clients with enhanced protection, it will be important to obtain values of their pensions on 5 April 2023 and 5 April 2024.
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Scheme specific tax-free cash
HMRC are introducing new legislation so that from 6 April 2024 the formula for calculating tax-free rights under scheme specific tax-free cash will be simplified. It means clients with fixed or individual protection will now be entitled to more tax-free lump sums than before 6 April 2024. Part of the formula shown in bold is changing to a fixed amount of 0.7154, rather than using the protected amount divided by £1.5m.
On 5 April 2006 Jacob had a fund of £500K and tax-free cash entitlement of £200K. The current value is £900K. He has other pensions and registered for Fixed Protection 2012.
His scheme specific tax-free cash is calculated as follows:
2023/24: (£200K x £1.8M/£1.5M) + 25% x [£900K - (£500K x £1.8M/£1.5M)] = £315,000
2024/25: (£200K x £1.8M/£1.5M) + 25% x [£900K - (£500K x 0.7154)] = £375,575
HMRC are also introducing legislation to confirm when clients take scheme specific tax-free cash, or stand-alone lump sums, only 25% of the total pension value is reduced from the LSA. However, the full tax-free value paid will be deducted from the LSDBA.
Transitioning from the lifetime allowance
Many clients will have started to access their pensions prior to 6 April 2024 and have further benefits to access. Where someone used 100% of the lifetime allowance then their LSA and LSDBA will both be nil, otherwise, for each benefit crystallisation event (BCE) that occurred before 6 April 2024 the LSA and LSDBA will be reduced.
The LSA is reduced by an amount equal to 25% of the lifetime allowance previously used.
Example, Samantha crystallised benefits valued at £375,000 in May 2014 when the LTA was £1,250,000, this used 30% of Samantha's LTA.
The LTA is now £1,073,100, 30% has already been crystallised, which is a value of £321,930.
Therefore £321,930 x 25% = £80,482.50 of the lump sum allowance has been used.
The remaining LSA is £187,792.50.
The LSDBA is reduced by 100% of serious ill health lump sums or death benefit lump sums paid before 6 April 2024, or 25% of any other BCE.
Transitional tax-free amount certificate (TTFAC)
Where clients have not taken the maximum tax-free lump sums available at previous BCEs, rather than using the standard approach above, they may be entitled to additional tax-free lump sums by applying for a transitional tax-free amount certificate.
The requirement for this certificate is a result of going from a percentage-based system under the LTA to a monetary system. Previously it didn’t matter how a client took their benefits, but now it does.
The clients that could benefit from a transitional tax-free amount certificate include those who:
- Were unable to access any tax-free lump sum due to underfunded GMP.
- Did not wish to commute DB income for tax-free cash.
- Were entitled to guaranteed annuity rates (GARs) and maximised their income.
- Transferred benefits to a QROPS scheme.
- Are aged over 75 and have unused benefits that were tested as a BCE at age 75.
Example, if Joshua crystallised benefits in a S32 buy out bond using 20% of the lifetime allowance, there was no option for tax free cash as the GMP was underfunded, so only an annuity was purchased.
20% of £1,073,100 = £214,620. The default position would be to assume 25% of this was tax-free, which would reduce both the LSA and LSDBA by £53,655.
So long as suitable evidence can show no tax-free cash was taken, then a scheme can provide a transitional tax-free amount certificate so the LSA and LSDBA will not be reduced.
It could be detrimental for some clients to apply for a transitional tax-free amount certificate. Such as where someone:
- took tax-free lump sums when the LTA was greater than the LTA of £1,073,100.
- has taken scheme specific tax-free cash.
In these scenarios it may mean the actual amount paid is more than 25% of the current LTA. Some people therefore could have a lower tax-free entitlement using a transitional tax-free amount certificate. So, your advice will be important here.
How to obtain a TTFAC
To get a transitional tax-free amount certificate, you will need to obtain evidence of the clients previous BCEs to clearly evidence what, if any, tax-free lump sums were paid.
Where it is apparent the client may benefit, this evidence should be provided to the first scheme the client wants to access benefits from after 6 April 2024, that scheme will consider the evidence and, where suitable, provide a transitional tax-free amount certificate.
Schemes have up to three months to provide a transitional tax-free amount certificate, so you may want to factor this into any retirement planning.
The certificate confirms the actual tax-free lump sums taken prior to 6 April 2024. To take advantage of the tax-free lump sums made available by using the certificate clients would need to have available uncrystallised funds.
Restrictions on applying for a TTFAC
Individuals whose only pensions in payment are pre-commencement pensions and have had no BCEs between 6 April 2006 and 5 April 2024, cannot apply for a transitional tax-free amount certificate. Where someone has had one or more BCEs between 6 April 2006 and 6 April 2024, including any notional BCE that took place at age 75, they will be eligible to apply for a transitional tax-free amount certificate.
It is not possible to apply for a transitional tax-free amount certificate if someone has already had an RBCE from 6 April 2024.
Finally
These changes mean some clients may benefit by reviewing the pensions they have already taken and applying for a TTFAC to increase the tax-free lump sums they can access. Other clients may wish to delay accessing their benefits until HMRC provide further guidance.
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