November 2024 Lifetime allowance abolition fixes
At the time the Finance Act 2024 reached Royal Assent in February 2024, no corrections or changes had been made to the original text. Although it led to the abolition of the lifetime allowance (LTA) on 6 April 2024, there were several errors in the initial legislation that needed to be corrected, many of which were delaying clients accessing their benefits correctly or risking losing the rights to tax free payments.
The revised legislation came into effect on the 18 November 2024, but the corrections were backdated to 6 April 2024. Additional guidance was published in the Pension Scheme Newsletter 165. The guidance was designed to address the remaining issues that the revised legislation hadn’t fully covered or fixed. The newsletter confirmed that there were still a few things that needed to be addressed, so the job is not yet complete, but the main issues preventing many from accessing their pensions correctly have now been dealt with. Below we cover those issues in more detail.
Transitional Tax-Free Amount Certificates (TTFACs)
The changes around TTFAC were more about clarification of how the rules were intended to work, and a general tidy of the provisions. These changes are as follows:
- A penalty will now apply where a TTFAC is not issued by the pension provider within the required timeframe.
- The member’s previously used LTA amount should be shown on the TTFAC.
- Individuals must give a copy of their TTFAC to all pension schemes they are a member of within 90 days. Although the revised rules take effect from 6 April 2024, the earliest date the 90-day period can begin is 18 November when the regulations were introduced. For any clients with a TTFAC, you should ensure they are aware of the new requirement.
It is important to note that, where lump sums are paid by the scheme on reliance of an erroneous TTFAC these will remain an authorised payment. Any excess above the amount which should have been tax-free is subject to the member’s marginal rate of income tax.
Age 75 disregard
Under the initial rules, those who reached age 75 pre-6 April 2024 without having taken their full tax-free cash entitlement could have been worse off. This is because the standard transitional calculation included the age 75 BCE and LTA usage. There was no allowance for the fact that no tax-free cash was taken at that point, even though it wasn’t actually an option. This was clearly an oversight but was complicated by the fact that there were no post age 75 BCEs to rely on when calculating what may have subsequently been accessed.
Individuals could apply for a TTFAC (please see above) and in most cases this would solve the issue, but many may not have realised they needed to.
The 18 November legislation changes correct this by reintroducing the age 75 disregard. Those who reached age 75 and took no subsequent tax free payments between their 75 birthday and 6 April 2024, will revert to the same tax-free entitlement as under the old rules.
However, newsletter 165 confirms that this doesn’t solve the issue in all cases. Those who reached age 75 prior to 6 April 2024 and took tax free payments before 6 April 2024 will still need to apply for a TTFAC to correct the position if eligible. This is to ensure that the limits are applied correctly. Under a TTFAC application, all tax free payments need to be declared, even if the BCE was at age 75 and the payment made later.
Scheme specific protected tax-free cash
The formula has now been updated to correct it so that is works as expected. Essentially, the revised formula gives individuals the same entitlement as they would have had under the LTA regime. Within the formula the client’s LTA is now replaced with their Lump Sum and Death Benefit Allowance (LSDBA). It should be noted that this is their full LSDBA, not the residual if they have accessed benefits.
As well as the obvious error in the calculation, there was a change that could have been seen as a simplification. This was in relation to the revaluation of the fund value at A-day. The initial formula used a fixed factor or 0.7154. Had it remained, it would have benefitted those with higher LTA protections. HMRC decided this was a mistake and the revised formula reverts back to LSDBA/1.5 in the same way as LTA/1.5 was used previously.
The revised legislation confirms that no Lump Sum Allowance (LSA) is required to pay the protected tax-free cash, but the tax-free amount is limited to the available LSDBA.
Revised formula
Tax free cash value at A-day x 1.2
+
25% of (Fund value now – fund value at A-day x LSDBA/1.5)
Where protected tax-free cash is taken, the LSA reduces by 25% of the benefits crystallised. The LSDBA reduces by the full value of tax-free cash.
Primary and enhanced protection with tax-free cash entitlement greater than £375,000
Under the original legislation, it was not possible to pay out greater than £375,000 in tax free cash. Individuals had the choice of delaying payments or taking up to £375,000 and losing the protection. This has now been corrected.
Enhanced protection and transfers
Enhanced protection values are based on the value of the benefits that could be paid from the arrangement at certain dates, i.e. 5 April 2023 for the LSA and 5 April 2024 for the LSDBA. Under the initial legislation the enhancements were lost on transfer as, technically, nothing could have been paid from the new arrangement on those dates. The 18 November legislative change fixes this.
On transfer, the existing scheme will supply the receiving scheme the maximum values.
Lump sum death benefits
The revised legislation ensures that lump sum death benefits from funds crystallised pre-6 April 2024 are not tested against the LSDBA. HMRC’s reason for this is that these benefits will have already been tested under the LTA regime.
The new rules introduce a new requirement for scheme administrators to report funds crystallised prior to 6 April 2024 and those crystallised after, to ensure the correct values are tested against the LSDBA.
The rules also confirm that any income tax on lump sum death benefits in excess of the available LSDBA are dealt with by personal representatives, not the scheme.
Overseas Transfer Allowance
Under the initial rules the Overseas Transfer Allowance was reduced by the full value of the LTA used pre-2024, i.e. not just the tax-free cash.
The 18 November legislation fixes this by introducing a new ‘adjusted lifetime allowance previously used amount’. This disregards the original BCE 1, i.e. the drawdown funds being transferred.
Conclusions
It was a real shame that many of these issues prevented clients from accessing their pensions and full entitlement to their tax-free cash, for over seven months, and that there are still issues. If clients took benefits using the rules before they were amended, in most cases it won’t be possible to have the changes reflected in their outstanding allowances.
This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person.
Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refr
