As we approach the new tax year, Justin Corliss, Senior Pensions Development Manager at Royal London, explores the upcoming changes to the Lifetime Allowance regime and how this impacts high earners, especially those with NHS and other public sector pension benefits. He highlights the actions advisers should help their clients take now to make sure they aren’t disadvantaged later!
The lifetime allowance (LTA) is set to be abolished from 6 April 2024, and replaced by two new allowances measuring tax-free lump sums; the lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA). For most people, this will have minimal impact as their pension savings are well below any of these limits. However, for some higher earners, particularly (although by no means exclusively) those with public sector pension benefits, the transitional arrangements as we move from one regime to another present some unique challenges.
One aspect of the new regime that has garnered significant interest is, what happens when people have crystallised benefits prior to 6 April 2024 but have not received the maximum level of pension commencement lump sum (PCLS) available from that transaction.
To help illustrate the issue we’ll work through a fictional example of Dr Singh, who accrued benefits in the NHS 1995 scheme. In addition, she has approximately £400,000 in a defined contribution (DC) pension scheme from non-NHS employment. She has no LTA protections in place and is not eligible to secure any retrospectively.
An NHS Case Study
In 2022, Dr Singh retired from NHS work and fully crystallised her NHS scheme, which (conveniently for this case study) used exactly 100% of Dr Singh’s LTA. As she had adequate non-pension savings, maximising PCLS was less of a priority than maximising ongoing income. So, Dr Singh simply took the standard PCLS figure available without commutation of £139,970. This equates to approximately 13% PCLS, which is well below the 25% she could have taken, although commuting for full PCLS would have reduced her level of ongoing pension.
During Dr Singh’s annual review with her financial adviser in February 2024, she was made aware that it will be possible to regain some allowance for further PCLS if she crystallises her remaining benefits in the future.
Sarah, Dr Singh’s adviser, outlines the operation of these new allowances and explains that in most cases, if someone has used all their LTA prior to 6 April 2024, they will have nil remaining LSA and LSDBA post 6 April 2024 when these new allowances come into being.
However, for people like Dr Singh, who didn’t get 25% PCLS in their previous crystallisation event, it’s possible to apply for a transitional tax-free amount certificate. Dr Singh points out the name doesn’t exactly trip off the tongue, but she’s keen to hear more.
Sarah explains that Dr Singh needs to approach the pension scheme, the NHS 1995 scheme in this instance, to get evidence that she didn’t get the full 25% PCLS on the previous crystallisation. This evidence then needs to be provided to the scheme or provider with which she has uncrystallised benefits. Furthermore, it needs to be provided to them before her first crystallisation post-6 April 2024, or the option will be lost. Technically, it can be given to any provider with whom she has uncrystallised benefits, but in practice, it’s most likely to be the one she intends to take benefits from. If Dr Singh had received more than one PCLS, she’d need to provide full evidence of each one.
Sarah then goes on to outline the significant difference this can make to Dr Singh’s allowances post-6 April 2024.
If Dr Singh doesn’t apply for this transitional tax-free amount certificate, as she’s already used all her LTA, she will have no LSA or LSDBA available after 6 April 2024. This means she’ll have no entitlement to further PCLS from the £400,000 uncrystallised pot, and any lump sum death benefits her beneficiaries take on her death will all be taxable at their marginal rate of income tax.
Sarah goes on to point out that if Dr Singh does successfully apply for the transitional tax-free amount certificate, then the situation after 6 April 2024 looks quite different, and demonstrates the calculation for her.
LSA Calculation
£268,275 (standard) – £139,970 (PCLS taken) = £128,305 LSA remaining
LSDBA Calculation
£1,073,100 (standard) – £139,970 (previous lump sum taken) = £933,130 LSDBA remaining
As Sarah’s calculations show, the difference is quite stark. Without the transitional tax-free amount certificate, there’s no eligibility for any PCLS from the £400,000 uncrystallised DC pot. However, with the transitional tax-free amount certificate, she has more available than she currently needs. Sarah reminds Dr Singh that even though she will have £128,305 LSA remaining once the certificate is procured, she’s still limited by the normal rules of only being able to take 25% of the £400,000 as PCLS, so it would currently only use £100,000 of her remaining LSA.
Also, rather than having no LSDBA remaining, Dr Singh will now have £933,130 of the LSDBA, meaning that her beneficiaries would have the option of taking lump sums without a tax charge applying if Dr Singh dies under the age of 75. If Dr Singh dies over the age of 75, the remaining LSDBA is irrelevant as all benefits, whether they’re taken as income or a lump sum, are taxed at the beneficiary’s marginal rate of income tax, whether they’re above or below the LSDBA.
However, as PCLS can be taken post-age 75, the remaining LSA is still important.
How and when to take action for your clients
Advisers may want to use the remaining period before 6 April 2024 to identify clients who have previously taken pension benefits but may not have received the maximum available PCLS available. A good starting point is to identify clients that have taken benefits from schemes that don’t provide the 25% PCLS as standard, hence the earlier reference to public sector pensions. Doing so will avoid what could be considered foreseeable harm, and the required action needs to be taken before the first relevant crystallisation event post-6 April 2024 or the opportunity will be lost.
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