ABOLITION OF THE LIFETIME ALLOWANCE

From 6 April 2024 the Lifetime Allowance is being replaced with new allowances. The information on this website is based on our understanding of the Finance Act 2024 and other documents, like HMRC newsletters.

WHAT’S CHANGING?

From 6 April 2024 LTA will be replaced with 3 separate allowances:

Name Allowance Description
Lump Sum Allowance (LSA) £268,275* A limit on the tax-free payments that can be made from all of an individuals’ pension arrangements as Pension Commencement Lump Sum (PCLS) and/or as the tax-free part of Uncrystallised Funds Pension Lump Sums (UFPLS).
Lump Sum and Death Benefit Allowance (LSDBA) £1,073,100* A limit on the total payments that can be paid tax-free from all of an individuals’ pension arrangements.
Overseas Transfer Allowance (OTA) £1,073,100 A transfer to a QROPS will be subject to an Overseas Transfer Charge of 25% on the full value of the transfer. Under certain circumstances this charge will not be applied and the transfer will qualify for the Overseas Transfer Allowance (OTA) which, for the tax year 2024/25, is set at £1,073,100. Where the cumulative value of transfers to QROPS exceeds this allowance the 25% Overseas Transfer Charge will apply to the value of the transfer in excess of this allowance. Any amount that exceeds this allowance will incur a flat rate tax charge of 25%.

*This is the standard allowance. Allowances may be different if clients hold lifetime allowance protection.

FREQUENTLY ASKED QUESTIONS

  • 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 an email 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.

Type of protection Lump sum allowance Lump sum and death benefit allowance
Enhanced protection If tax-free cash entitlement of more than £375,000 and more than 25% of the fund on 6 April 2006 could retain tax free cash entitlement. Maximum tax-free cash shown on protection certificate.

Since 6 April 2023, tax-free cash is still based on this percentage, however, it’s applied to total benefit value on 5 April 2023.

Scheme specific protection may apply.

If tax-free cash entitlement of more than 25% but less than £375,000 on 6 April 2006, they couldn’t protect tax-free cash using enhanced protection. Where there is no protected tax-free cash the lump sum allowance is £375,000.

The amount of uncrystallised funds on 5 April 2024.
Primary protection If pre-6 April 2006 tax-free cash was less than £375,000, the amount payable is the lesser of 25% of the benefit value and 25% of £1.5m.

If tax-free cash exceeded 25% of the LTA on 5 April 2006 it is protected as a monetary amount. Since 6 April 2012 the amount payable is 25% of the value on 5 April 2006 increased by 20%.

Maximimum tax-free cash entitlement is shown as a monetary amount on the protection certificate.

£1,800,000 x the individual’s primary protection factor.
Fixed protection 2012 £450,000 £1,800,000
Fixed protection 2014 £375,000 £1,500,000
Fixed protection 2016 £312,500 £1,250,000
Individual protection 2014 25% of protected amount the lower of £1.5 million or the value of benefits on 5 April 2014
Individual protection 2016 25% of protected amount the lower of £1.25 million or the value of benefits on 5 April 2016

IMPACT ON SCOTTISH WIDOWS PLATFORM

Scottish Widows platform Terms and Conditions and literature have been updated and will be available from 6 April 2024. Our IT enhancements are well underway, and we look forward to updating you soon on the platform updates we are making. In the meantime, please bear with us whilst we work with the new rules.

Temporary new processes from 6 April 2024

Due to the late issue of some of the regulations our systems will not be completely updated from 6 April 2024, but rest assured ensuring clients get their money is a priority for us and we have introduced some additional processes.

Process for Crystallisation

When you are working through the crystallisation wizard it will still ask you questions about the Lifetime Allowance, please continue to complete these and submit the wizard. At the same time, you will need to complete and submit a “Lump Sum Allowances form” that will be accessible from the platform when you enter the crystallisation wizard. Please email the form to allowances@scottishwidowsplatform.co.uk. The wizard and the form will need to be submitted by 2.30pm for the crystallisation to be authorised that day. If it is not, and the values change overnight, you may have to rekey the wizard the next day.

Process for obtaining Transitional Lump Sum Allowance Certificate

The request for the Transitional Lump Sum Allowance Certificate must come from the client, although the adviser can send it or email it to us. We will accept a signed letter from the client with all the relevant evidence of previous crystallisations (e.g. LTA Certificates, bank statements), the evidence must confirm the LTA used and tax-free sums paid.  We would also need any Protection Certificates if applicable.

Transitional Certificates should only be applied for where it is beneficial to the customer and there are only a few circumstances where this might apply for example, on a previous crystallisation the customer took less than 25% tax-free cash, or where the client crystallised benefits when the LTA was below £1,073,100.00. For more information on Transitional Lump Sum Allowance Certificates and how to apply for them, please check our Support hub.

Process for clients with Protection who want to pay in additional contributions

Clients with Enhanced Protection and Fixed Protection that was granted before 15 March 2023 can now pay contributions into their accounts without losing their protection. The block in the platform to allow these contributions has not yet been removed. The platform will, however, allow you to remove the protection, process the contribution and then rekey the protection. The original date the protection was granted will not be impacted by this workaround.

Flexi-Access Drawdown (FAD) Mergers

In some circumstances clients have more than one FAD pot and where this is the case, we will usually merge these on request. Whilst we are implementing the new regulations, we will not be supporting requests for FAD mergers. If you send us these requests, we will stockpile them until our system is fully updated for the new regulations. There is no detriment to the client in holding more than one FAD pot.