Abolition of the
lifetime allowance

• From 6 April 2024 your clients tax-free benefits will be tested against the new allowances. Any Lifetime Allowance used in previous tax years will be converted to Lump Sum Allowance and Lump Sum and Death Benefit Allowance.
• It’s expected that relatively few clients will exceed the new allowances.
• There may be complexity for clients who have pre-commencement pensions, those who took benefits when the Lifetime Allowance was different to £1,079,100 or those who have protected benefits.

From 6 April 2024 lump sums and lump sum death benefits, as well as transfers to overseas pension schemes paid out of UK pension schemes will be tested against the new allowances:

What are the new allowances?

• Lump Sum Allowance (LSA) applies to Pension Commencement Lump Sums (PCLS) and the tax-free element of Uncrystallised Fund Pension Lump Sums (UFPLS). The allowance is £268,275; any excess lump sum payments will be taxed at the marginal rate of income tax.
• A higher allowance may be available if the client had pension protection before 6 April 2024.

Lump Sum & Death Benefit Allowance (LSDBA) applies to lump sums payable on death. The allowance is £1,073,100; any excess lump sum payments will be taxed at the recipient’s marginal rate of income tax.  The following will be deducted from the LSDBA:

• Pension commencement lump sums and the tax-free elements of any uncrystallised funds pension lump sum.
• Uncrystallised funds lump sum death benefits.
• Drawdown pension fund lump sum death benefits and flexi-access drawdown lump sum death benefits from benefits crystallised on or after 6 April 2024.
• Serious ill-health lump sums.
• Defined benefit lump sum death benefits.
• Pension protection lump sum death benefits.
• Annuity protection lump sum death benefits.
• Lump sum death benefits paid after age 75 are not tax-free.

RBCEs have replaced Benefit Crystallisation Events (BCEs). RBCEs will cover the payment of relevant lump sums and relevant lump sum death benefits.

• Clients who have already taken benefits from their pension before April 2024 will have their allowances reduced accordingly.
• A standard transitional calculation will be used when converting any LTA used between 6 April 2006 and 5 April 2024 into LSA and LSDBA.
• In some limited circumstances clients may be able to increase the value of their available allowance by applying for a Transitional Tax-Free Amount Certificate (TTFAC). Some of the circumstances where a transitional tax-free amount certificate will help the individual are:
  • If any benefits were crystallised when the lifetime allowance was below £1,073,100
  • Transfer to a qualifying recognised overseas pension
  • A serious ill-health lump sum was paid
  • If less than 25% tax-free cash was paid because
    • GMP restricted the tax-free cash
    • The crystallised benefits included a disqualifying pension credit
    • It was a defined benefit scheme, and the tax-free cash taken was not 25% of the benefits value.
• It’s expected that this certificate will be required by only a small number of clients. If clients apply for a TTFAC then they are restricted going forwards to the allowances quoted in the certificate.

A transitional tax-free amount certificate is a certificate for an individual that shows the amount of the individual’s lump sum transitional tax-free amount, and the amount of the individual’s lump sum and death benefit transitional tax-free amount. It must be applied for by the client. It must be applied for before the first relevant benefit crystallisation event takes place after 6 April 2024. It may be beneficial in some circumstances (see question above).

• When conducting annual reviews or carrying out crystallisation events advisers should review remaining available allowances with their clients. Where appropriate they may want to instruct the client to apply for a Transitional Tax-Free Amount Certificate.
• TTFAC applications can only be made from 6 April onwards. To apply we must have a signed letter from the client (this can be forwarded by the adviser) and copies of Lifetime Allowance Certificates from previous crystallisation events as well as evidence of tax-free amount paid e.g. bank statements. In addition we will require copies of Protection Certificates.

• Where clients have LTA protection, it will continue to apply to the new allowances.
• There are many existing protections that will apply to the LSA and LSDBA. Protection is a complex topic and our Financial Planning experts will look at it in detail in a forthcoming edition of TechTalk.

Individuals with protection applied for before 6 April 2024 can retain that protection and have access to higher lump sum allowances. See the below table.

Clients with Enhanced or Fixed Protection that was awarded before 15 March 2023 can, since 6 April 2023, restart contributions into their pension without losing their protection.