01 APR 2024

Technical Newsletter - LTA abolition special edition

Issue 5 - April 2024

 

Abolition of the lifetime allowance (LTA)

The big news this month in the pension industry has been the removal of the lifetime allowance. The chancellor Jeremy Hunt announced its removal in his budget on 15 March 2023. There followed a policy paper in June 2023 and then the Finance Bill 2023/24 in the autumn. This received Royal Assent on 22 February 2024 and has passed into law.

 

So, the sky is the limit then on pension accumulation now?

Not quite. In place of the lifetime allowance, the Government is introducing two new allowances, the lump sum and death benefit allowance (LSDBA) and the lump sum allowance (LSA). These are £1,073,100 and £268,275 respectively, which advisers will recognise as being the old lifetime allowance and maximum tax-free cash sum limits for anyone who didn’t have one of the pension protections. No provision has been made within the legislation for these to ever increase.

 

What do these new allowances do?

From 6 April 2024, the new allowances only focus on lump sum payments taken from pensions with specific emphasis on non-taxable lump sum payments. Pension income payments are not tested against them.

 

Lump sum and death benefit allowance (LSDBA)

This sets the limit for the amount of tax-free benefits which can be passed onto beneficiaries when a member dies before age 75. It also sets the limit for tax-free benefits which can be paid under the serious-ill health option. After age 75, or where a claim is not settled within two years of a death being notified, the death benefits are taxed at the beneficiary’s marginal rate. Benefits exceeding the LSDBA are also taxed at marginal rate.

 

Lump Sum Allowance (LSA)

This is an upper limit on the amount of tax-free cash a member can take during their lifetime. Generally speaking, it is 25% of the member’s pension pot, so if for example someone has a pot of £500,000, £125,000 of that will be tax-free.

 

How do these allowances work in practice?

When a member accesses their pension funds, the tax-free portion of their payment will be deducted from both the LSDBA and LSA.

Examples:  Sheila crystallises £800,000 and takes a PCLS of £200,000, with the remainder being designated to flexi-access drawdown (FAD).  Her LSDBA will be reduced from £1,073,100 to £873,100 and her LSA reduced from £268,275, to £68,275.

Jim takes an UFPLS of £400,000. The first £100,000 of that payment is tax-free, with the rest being taxable. His LSDBA will reduce from £1,073,100 to £973,100 and his LSA from £268,275 to £168,275.

 

Lifetime allowance protections

Despite the removal of the lifetime allowance, these protections are still important as they will increase an individual’s LSDBA and LSA. Someone with Fixed Protection 2012 as an example, will have a LSDBA of £1,800,000 and LSA of £450,000.

 

 

Benefits taken before 6 April 2024

Benefits taken before this date will reduce both the new allowances, by way of a calculation assessing the proportion of the old lifetime allowance used. This is known as the standard transitional calculation. The default calculation assumes that the member received 25% of their payment tax-free and it is this non-taxable element that is deducted.

Example: Prisha crystallised £500,000 in October 2017 when the lifetime allowance was £1,000,000.  This means she used up 50% of the lifetime allowance. The calculation assumes that she received 25% of this figure tax-free. Her LSDBA and LSA will therefore be reduced by; £1,073,100 x 0.5 x 0.25 = £134,137.50. This leaves her with a LSDBA of £938,962.50 and a LSA of £134,137.50.

 

Bye bye, BCEs, hello RBCEs!

The old benefit crystallisation events have gone and been replaced by a number of new “relevant benefit crystallisation events” or RBCEs.

 

Transitional tax-free amount certificates.

Those with a flair for numbers will note that Prisha’s calculation has left her with exactly half of her LSA left, even though her £125,000 tax free cash sum payment taken in 2022 was less than 50% of the new lump sum allowance. There will also be other members who for whatever reason crystallised benefits in pension schemes prior to April 6 2024 and did not take any tax-free cash. For these people the standard calculation will leave them worse off.

To ensure that individuals are not adversely affected by the standard calculation, it is possible for them to apply to the first pension scheme they take benefits from after 6 April 2024 for a Transitional tax-free amount certificate (TTFAC). This certificate will confirm the actual amount of tax-free lump sum taken by the member and it is this figure which will be deducted from the LSDBA and LSA.

 

Example

Returning to the example of Prisha, when she used up 50% of her lifetime allowance in October 2017 by crystallising £500,000, she received £125,000 as a lump sum. If she takes further benefits after 6 April 2024, she can apply to the scheme paying those benefits and submit evidence of her previous crystallisation event.

The scheme will provide her with a certificate confirming that £125,000 has been paid as a tax-free lump and this will be deducted from her LSDBA and LSA instead of £134,137.50, leaving her with £948,100 and £143,275 respectively.

• To avoid being penalised by the standard transitional calculation, Prisha MUST obtain her certificate BEFORE she takes her first RBCE after 6 April 2024.

 

Last minute teething problems, beware!

On 4 April 2024, HMRC issued the latest edition 158 of their newsletter. In this newsletter, they acknowledged issues with a number of scenarios covered by the new rules.

In the international market space, the biggest one is the new overseas transfer allowance, or OTA. This comes into play when a member transfers to a QROPS.

The new OTA is £1,073,100 and when this is exceeded, an overseas transfer charge of 25% will apply to the excess funds. This incidentally is in addition to any overseas transfer charge triggered by the existing rules, such as a member who transfers to a QROPS in a country which is not their residence (different countries within the EEA are exempt from this).

The legislation provides that where a member has crystallised benefits before 6 April 2024, their OTA is reduced by 100% of their previously utilised LTA. This would include any amount designated to drawdown. So, for example, if someone crystallised £600,000 in March 2023, their OTA would be reduced by 55.9% leaving them with just £473,237.10.

However, should these funds designated to drawdown then be transferred to a QROPS after 6 April 2024, they will again by deducted from the OTA.

The Government is therefore going to bring forward legislation to remove this double counting. In the meantime, HMRC have advised that members affected in this way, may wish to postpone their QROPS transfer, until the rules have been amended.

There are a number of other scenarios where HMRC are advising that members may wish to postpone decisions at the moment. There is too much detail to expand on these here and therefore we recommend that advisers may wish to read the HMRC newsletter separately.

It can be downloaded here. We welcome questions where clarification on any of these issues is required. Please feel free to email technical@ifglpensions.com

In the meantime, we hope that this special LTA abolition pensions technical newsletter is helpful to all our readers in understanding what is quite a complex legislative change.

 

IMPORTANT NOTE IFGL Pensions cannot accept any responsibility for any action taken or refrained from being taken as a result of this information.