In the following analysis for IFA Magazine, Justin Corliss, technical and pensions expert, Royal London, digs deep into the detail using practical examples to highlight the changes brought about following the abolition of the pensions Lifetime Allowance (LTA).
The new tax year signalled the abolition of the LTA and the introduction of a new regime focused on measuring tax-free lump sums. Overall, this is likely to be positive for those it does impact, as the new allowances, the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA), will be utilised in fewer instances than the LTA.
However, we aren’t quite done with the LTA yet, as its usage prior to 6 April 2024 will impact the starting point for these new allowances.
The standard LSA is £268,275 and the standard LSDBA is £1,073,100. Broadly, these are limits on what can be taken from someone’s pension as a tax-free lump sum during their lifetime, and by their beneficiaries on their death before age 75 respectively. These allowances will be higher for those holding LTA protection. For example, someone with Fixed Protection 2016 will have an LSA of £312,500 and a LSDBA of £1,250,000.
Someone who has used up 100% of their LTA prior to 6 April 2024 begins the new regime with a LSA and LSDBA of zero. If someone in this situation has no benefits left to take this may not be an issue because any remaining LSA will not be required. Furthermore, as all benefits were crystallised before 6 April 2024 they will not be measured against the LSDBA when they pass away.
There are standard calculations for those who have used some but not all of their LTA prior to 6 April 2024 to determine their LSA and LSDBA. For those with no LTA protection, these calculations will be as follows:
Standard LSA: £268,275 less 25% of LTA usage as at 5 April 2024
Standard LSDBA: £1,073,100 less (25% of LTA usage as at 5 April 2024 plus any serious ill-health lump sum paid prior to 6 April 2024)
These calculations will be effective and accurate for many people, but what if someone didn’t receive a 25% tax free lump sum at one of their previous crystallisation events? The calculations assume that they did, and in a brave new world where the sole focus is on measuring tax-free lump sums taken, that’s a bit of a problem.
The solution is the transitional tax-free amount certificate. Rather than applying a calculation to estimate the level of tax-free lump sum taken, the transitional tax-free amount certificate will reduce the LSA by the actual amount of tax-free lump sum taken.
Let’s take an example of an NHS clinician without LTA protection who began receiving their NHS 1995 scheme pension in April 2022. Their first year pension is £46,657 and their tax-free lump sum is £139,971. This used 100% of their LTA.
This clinician has a further £200,000 in an uncrystallised DC pension fund which they would now like to access in July 2024, but due to using 100% of their LTA in 2022, their LSA is £0, meaning no further PCLS is available.
If they were to apply for a transitional tax-free amount certificate, which they can do with any scheme of which they’re a member, this will show revised LSA and LSDBA figures based on the actual level of tax-free lump sums taken. In this example, the LSA would be £268,275 – £139,971 = £128,304. Similarly, their remaining LSDBA will be £1,073,100 – £139,971 = £933,129.
Applying for the certificate means 25% PCLS can be taken from the uncrystallised £200,000 pot, and if the member died before age 75, a lump sum death benefit could be paid to the beneficiaries without a tax charge applying.
“These sound great, let’s all get one” I hear you cry. Well, not so fast, because transitional tax-free amount certificates can work to opposite way too, as they assume a £1,073,100 LTA. So it’s vital that the calculation is run to ascertain whether the transitional tax-free amount certificate will in fact produce a higher remaining LSA figure than the standard calculation. If the standard calculation will produce a higher remaining LSA figure, don’t apply for a certificate, as this is the figure that will be used.
It is vital that individuals planning to rely on a transitional tax-free amount certificate secure this prior to receiving a tax-free lump sum post 6 April 2024. Once a tax-free lump sum has been taken post 6 April 2024, a transitional tax-free amount certificate can no longer be issued.
The new regime is only concerned with tax-free lump sums taken, and LTA usage up to 6 April 2024 will dictate the starting position for the new allowances. For most people, the standard calculation will provide an accurate starting figure, but for those it doesn’t, they may need to apply for a transitional tax-free amount certificate, in which case it must be secured before they receive a tax-free lump sum.
