Back in March 2023, under the previous government, Jeremy Hunt, in his Spring Budget Statement, dropped the unexpected bombshell that the Lifetime Allowance (LTA) would be abolished from April 2024.
Without going into the politics of the decision, we have now had several consultations, policy papers, newsletters, bills, and legislation which has received Royal Ascent to become law. We are now in the 2024/25 tax year and living in the new world without the previous tax implications of the LTA casting a looming shadow over an individual’s overall financial planning. As you will come to learn though, whilst the LTA tax itself may have gone, it has well and truly stamped its mark in the history books, and continues to leave a lingering aftertaste.
On the face of it, a tax that individuals could have been subject to has now been removed, therefore things should be much simpler now, right?
The answer for some people could be a resounding yes! Depending on your circumstances, you could be living in a world which is a lot simpler to understand when it comes to accessing your pension benefits.
However, as with all major pension legislation changes that have happened in the past, the answer for some may well be a no! Lest we forget, “pension simplification” back in 2006 was in fact, anything but that!
For anyone who accessed their pension benefits on or before the 5th April 2024, there are now new transitional rules in place which have added a new layer of complexity to an already complex world of pension legislation. Therefore, depending on your circumstances, you could now be living in a world which has dialled up the complexity. Worst of all, being too hasty with accessing your pension benefits without taking regulated financial advice first could have a negative impact on the benefits you receive going forward!
Let’s take a brief look then at what has been thrown into the gruelling pension arena for us to consider when it comes to accessing your pension benefits in the UK.
Lump Sum Allowance (LSA)
You now have a limit on the amount of lump sums you can take tax-free from a pension scheme. The standard LSA is £268,275 which, for those of you that may have spotted it already, was 25% of the previous LTA of £1,073,100. Remember that lingering aftertaste?
Whilst the LTA tax charge may have gone, that limit which the previous LTA placed on how much tax-free cash you could take from your pension still remains!
For those of you who had a valid LTA protection certificate and are thinking “what now?”, do not despair… your LSA limit is now 25% of the previously protected amount. For example, if you had Fixed Protection 2016 which protected your LTA at £1.25m, then your LSA is now 25% of that protected amount i.e. £312,500.
Where you have fully taken your LSA, income tax may be payable on the excess above this.
Lump Sum and Death Benefit Allowance (LSDBA)
You now have a limit on the amount of lump sum death benefits and serious ill-health lump sums that can be paid tax-free from a pension scheme. The standard LSDBA is £1,073,100 which, funny enough, is exactly the same as the previous LTA of £1,073,100. Notice the aftertaste still?
Again, for those with LTA protection, as with the protection of your LSA, your LSDBA is also protected and equates to 100% of the protected amount. Back to the previous example, if you had Fixed Protection 2016 which protected your LTA at £1.25m, then your LSDBA is exactly that, £1.25m.
Where the LSDBA is fully used up, income tax may be payable on the excess above this at the recipient’s marginal rate.
Understanding the transition
As you can see, the introduction of the LSA and LSDBA makes it clear that the amount you can obtain from your pension tax-free still has limits placed on it.
The complex part now…
For those of you that accessed any pension benefits on or before the 5th April 2024, we need to pause for a minute and take some time to consider the situation as it stands. Then, we need to understand what actions you could take now that will have an impact on the amount you will derive from your pension arrangements.
Let’s be clear… The 6th April 2024 was not a clean break from the previous LTA regime. Your new LSA and LSDBA will consider the benefits you have previously taken from your pensions before this date and will reduce them accordingly. On the whole, it reduces them in a relatively simple way (I say this because there are situations where it’s not as simple which I will not go into detail here).
Where you were previously provided with an LTA percentage used figure or certificate from your pension scheme, the new HMRC transitional calculation assumes a flat approach that you took a 25% tax-free lump sum from all of these benefits received. It also assumes that the LTA percentage that you previously used up was based on an LTA figure of £1,073,100 which, as you may already be aware, hasn’t always been at this level in the past. There will be several instances where the level of tax-free cash you took will be less than this amount, possibly even zero.
For anyone that commenced benefits from a defined-benefit scheme (otherwise known as final-salary scheme), you may have elected not to take a tax-free lump sum in favour of a higher level of income. However, you will still have been provided with an LTA percentage used figure from the scheme. Even where you elected for the maximum amount of tax-free lump sum, this could still be lower than the transitional calculation.
For anyone who took benefits when the LTA was below £1,073,100, then the amount of LTA % used up to provide the 25% tax-free lump sum would have been higher than what would have been used had it been £1,073,100, which is what the transitional calculation considers.
There will be other situations where you may have taken an amount of tax-free lump sum that was less than 25% of your pension fund.
As far as the new regime is concerned, it doesn’t factor in these situations, and just assumes you took 25% as a tax-free lump sum and reduces your LSA and LSDBA accordingly.
With these thoughts in mind, some of you may think you are being overly penalised in the new world for not previously taking your tax-free cash, or taking it at a particular time. Do not despair though, there is an important piece of new legislation which aims to solve this potential issue.
The rise of the Transitional Tax-Free Amount Certificate (TTFAC)
Where you think your LSA and LSDBA might be adversely impacted by the decisions you made in the past to access your pension benefits, with effect from the 6th April 2024, you now have the option to apply for a TTFAC from your pension scheme, which will generally be the scheme where you are looking to take benefits.
This certificate will be issued by your pension scheme, and ignores the standard HMRC transitional calculation assumption detailed above, and instead considers the actual amount of tax-free cash sums which were paid to you. Your LSA and LSDBA will then be reduced by these figures.
It is important to note that there is no requirement to do this. Whilst some people may gain benefit from a TTFAC, there are situations where a TTFAC could reduce your LSA and LSDBA by more than the standard transitional calculation and therefore be worse off.
There are some strict conditions and implications for electing to receive a TTFAC and so here are the important bits now…
- An application can be applied for from any scheme in which you are a member on or after the 6th April 2024.
- Where an application is made, to be eligible you must provide the scheme with complete evidence of the tax-free amounts previously received (examples of this include financial records, scheme confirmations of payments, benefit crystallisation event statements or bank statements)
- Schemes have 3 months to issue or refuse to issue a certificate to you.
- An application for a TTFAC must be applied for and a certificate issued to you BEFORE you receive your first lump sum benefit from a pension scheme on or after the 6th April 2024, otherwise you will not be eligible.
- Once a certificate is issued, it cannot be revoked.
The last two points are the most important ones, and this is a call to action for anyone who is looking to access their pension benefits further to what they have taken on or before the 5th April 2024.
Let us conclude…
Headache? We don’t blame you… As ever, navigating the pension world continues to be a complex endeavour and it is important that you seek proper regulated advice to make sure you’re making the right decision. At Craven Street Wealth, we have a plethora of financial planners who are able to provide you with appropriate financial advice on accessing your pensions which is custom built to you and your circumstances to help steer you in the right direction.
To speak to a Financial Planner about your own pension planning, please contact us on 0330 320 9280, email info@cravenstreetwealth.com or complete our online enquiry form.
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
Craven Street Financial Planning Limited is authorised and regulated by the Financial Conduct Authority.
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