Quite simply - the new pension allowances Q&A

Introduction

The M&G Wealth Technical team delivered an online technical event covering the new pension tax allowances post the abolition of the LTA. These are the questions and answers from the live event

Who do you apply to for a Transitional Tax-Free Amount Certificate? Is it the provider they are considering taking their first RBCE from?

You can apply to any scheme you are a member of. And when HMRC update regulations you will be able to ask an annuity provider who is paying your annuity too.

I have a pension in the Pension Protection Fund (FAS) which will be the next one I take benefits from later this year. Will they issue a TTFAC or do I need to get it from a 'real' pension provider?

We believe they would issue one as they are treated as pension schemes and you can ask a scheme you are a member of for one.

Once you’ve requested a TTFAC, are you obliged to use the transitional amount for future RBCEs, or can the choice be made between default and transitional at the point of the first RBCE (ie should I request TTFACs now, before any anticipated RBCEs in the future)?

The TTFAC overrides the standard default calculation and can only be cancelled if found to be inaccurate (a client cannot revoke it), so care should be taken that this doesn’t put the client in a worse position for allowances. TTFACs need to be issued before the first RBCE, or else you cannot apply for one.

We are finding some providers refusing to provide evidence of tax free cash amount previously drawn. Can we make a complaint to these firms and are they obligated to provide evidence?

There is no specific obligation to provide this, and it may be that the request is too historic for the provider to have retained these records. You can complain to firms, but the success of the complaint would be dependent on the circumstances.

RE the application for Transitional Certificate. I note Pru have developed a form for this. Can this be completed by the adviser as the "personal representative"? It is unclear on your form. Royal London for example have a neat online form allowing you to upload the evidence and detail the info

We will accept an application completed and signed by the adviser on file.

You said anyone with enhanced protection cannot apply, is this all protections. ie fixed protection 2016 etc. So anyone with an enhanced protection higher than £1073000 cannot apply

It’s for members who had enhanced protection and tax free cash protection (lump sum rights above £375,000 as at 5/4/2006). Their allowances are snapshots in time (LSA based on tax free entitlement as at 5/4/23 and LSDBA based in uncrystallised rights as of 5/4/24) and nothing can be done to alter this.

Does a pre 2006 DB where no PCLS was paid not allow client to claim TTFAC ?

It doesn’t, this is based on information from HMRC in pension scheme newsletter 157. 

We have someone with pre 2006 and post 2006 crystallisations. They did not take TFC from pre 2006 pension so we thought we could apply for a TTFAC but are you saying this is no longer an option?

Yes, despite statements to the contrary previously. This was confirmed in pension schemes newsletter 157. The only people who will benefit for a TTFAC are those whose 2006 to 2024 tax free amounts are lower than the defaults.

 

Did you say that following the changes, then if a beneficiary inherits a pension pot tax free where dec'd died b4 age 75, that if or when beneficiary takes monies out, then that would reduce their own LSA or LSDBA allowances

No, the taxation will be as currently the new change is if a beneficiary dies and the next beneficiary receives a lump sum then the lump sum will be tested against the deceased beneficiaries LSDBA (unless that pot derived originally form money that had been tested against the LTA.

How will the Revenue be able to track the LSDBA if this is passed to 2nd and 3rd generations? I am asking as you said the only test now would be when the money left.

The personal representative will need to identify if the lump sums paid on death are over the available LSDBA and report it to HMRC.

The treatment of death benefits from crystallised funds pre/post 75. These are now tested against the LSDBA?

Funds crystallised under the LTA will not be tested against the LSDBA. Funds settled as a lump sum death benefits where the member, or beneficiary if it is a beneficiary drawdown pot, died pre 75 (within 2 years of the scheme becoming aware of the members death) will be tested against the LSDBA.

The exception to this is those that have derived from funds that have been LTA tested prior to 6^th April 2024.

Under the LTA regime pre-75 drawdown pots were no tested against the LSDBA (however they were settled)

For Death in Service schemes is the risk still there for high earners creating tax bills - which means Excepted Schemes are still a relevant alternative?

Potentially, depending on the value of the DIS payment and how any other pensions the client has are likely to be settled.

I have a client who died in Feb 2024 , we are sorting the claim now will the old death benefit rules apply (he was under 75) or does this apply

It would depends on when the beneficiaries became entitled to any pension. If they became entitled prior to 6/4/24 then it’s LTA rules, it’s the new regime that applied form 6/4/24. If you beginning the death claim process now it appears that this will mean it’s under the new regime.

If a 100% of the LTA is used up at 5th April 2024. Can you apply for a TTFAC and reinstate your LSDBA?

You can.

If a client has PTFC, but their total pension value is less than £100K, would it make much of a difference in the way the pension is taken. Are there any calculators available for this that include PTFC?

Possibly not, as we are in the new regime you would need to work out their starting LSA and LSDBA. If this more than covers the value of the pension there should be no issues in taking the pension.

Post 75 - the point is re taking lump sums - now can when old rules not?

You could take PCLS during your lifetime over the age of 75 under the LTA rules.

SSTFC - think you said about holding off taking benefits due to a calc issue. Is this still the case if nowhere near the LSA max? i.e. hold off taking action or all fine to proceed in this case?

Yes, it is a problem with the calculation that has meant HMRC wanting them delayed and not related to available allowances.

Hi. Each pension plan having a max of 25% TFC normally still matter when it comes to what client can take from each plan tax free? Or as long as overall client doesn’t exceed the LSA, they could potentially take more than 25% from one plan only? Thanks

The applicable amount rule still applies. For most this will be 25% of the fund value. The new rules state you maximum PCLS will be the lower of your applicable amount, your remaining LSA and your remaining LSDBA.

If a client has an uncrystallised pot, can you please confirm the new rules with regards to scheme specific TFC (with no LTA protection). Are they restricted by the new level of LSA if scheme specific lump sum greater than LSA?

No, to pay a scheme specific tax free cash (SSPTFC) amount the client only need to have some LSA remaining. The whole SSPTFC can be paid, we had an example in the seminar showing £1 of LSA left meant £150k of SSPTFC could be paid.

If a client only needs to have a minimum of £1 of LSA required to take scheme specific PTFC, but LSA usage in this instance is 25% of the crystallised fund value then how does this interaction work? Is the PTFC limited by the remaining LSA still?

No, as long as the client has remaining LSA the whole SSPTFC can be paid free of tax, even if this is over the remaining LSA. 25% of the amount crystallised is deducted from the LSA for future events.

If a client hasn't previously taken any TFC and doesn't qualify for any fixed or individual protections but has protected TFC percentage of say 30% which in monetary terms would be higher than the £268,275, are they limited to the £268,275? Are they taxed on taking the PTFC?

As long as they had some LSA remaining they can have the whole protected tax free cash payment tax free.

Client has a QROPS with enhanced protection with a certificate for 62% TFC. The client would like to transfer back to the UK - what with happen to protected TFC (fund value c£4m)

We will need to see how HMRC amend the current legislative issue of how to calculate limits for those with Enhanced Protection if they are not in an arrangement they were in on 5 April 23 or 5 April 24

What scheme LTA used information will be required from a previous crystallised scheme(s) at the time the client wishes to first crystallise benefits from their Prudential Pension? Will this be any different now post April 2024 to previously?

It depends on the scheme and contract – broadly we will accept a declaration that the member has adequate LSA to pay the amount we are about to pay, in the same way we did for LTA. If they have protection or inadequate allowances we will require a lot more information which we will collect on a form , also like we did pre April 24. For contracts with systematic benefit options we will need to be told the LSA used before we start to pay benefits and also if they use any elsewhere after they tell us what they had taken previously.

Someone who uses all tax free cash will the additional money taken be taxed at normal rates as applicable with current tax threshold at that time.

Yes, it will just be taxed as pension income.

I didn't understand what you explained about UFPLS. Can you give some examples of when somebody could only get say 20% of PCLS and have to pay tax on 80% instead of the usual 25% / 75% scenario

For the majority an UFPLS will be the 25%/75% scenario. It’s just when you are running out of allowances that this will be different. If you have £5,000 of LSA left and £750,000 of LSDBA and request a £50,000 UFPLS only £5k can be paid tax free, so a 10%/90% scenario. After you are out of tax free amounts you can now still request an UFPLS payment, it will just be 100% taxable.

Maybe a silly question, but other providers, notably Quilter, are using the acronym iLSA and iLSDBA, rather than the abbreviation L.S.A etc. Is the consensus about how to refer to these things in the future? I said "ill-sta-bah" to someone the other day and they looked at me like I had two heads.

It may end up being a potato, pottatoh scenario! HMRC did use this terminology initially but it seems to have not made it into common usage or guidance. It doesn’t really matter.

How is LSA affected by client who has taken regular income UFPLS only pre April 2024?

It depends on when this started. If after 6/4/2020 then it’s unlikely to affect their LSA and LSDBA materially. If before then it may as the LTA was lower than it’s final value meaning a TTFAC could be useful (depending on the remaining fund size compared to the standard default LSA). 

Do small lump sum payments come-off the allowances?

No, small pot payments neither require nor use LSA or LSDBA.

Will pension providers quote LSA and LSDBA on annual statements?

For those with a pension in payment the LSA and LSDBA used will need to be reported annually like the LTA used used to be. If the usage is the same it may be combined. If not they will be reported separately. This could be incorporated in annual statements, be on P60,s or a standalone statement to clients that require annual statements.

Is LSA & LSBDA relevant for someone who has 100% crystallised funds

It would depend on circumstances. If the client used all of this under the LTA rules they would not be tested against the LSDBA and if they have no unvested pot then there's no need to have a LSA. It could be if they wanted to start funding again.

Case study - is it jeff or is it bob - confusing slide!

Sorry, we used real name and stage name. We’ll use less famous fictional people from now on.

Les, client has protected LTA of £1,250,000 and is currently using phased income withdrawal, has always taken 25% lump sum each month. He has TFC of £312,500. Is any action required? Thanks.

If all of the benefits were taken based on the protected LTA being in force for each crystallisation their LSA and LSDBA usage will be the same. If not, they may be able to get a TTFAC.

In the old world, pension funds were either crystallised and uncrystallised. What are they called now?

Crystallised and uncrystallised, vested and unvested and Vested, PP and drawdown, pension savings and pension income – take your pick!

If you have Fixed protection 2016 at £312,500 and have taken £50K previously is your allowance simply £312,500 less the £50K?

Possibly. If this £50k was taken from a total crystallisation of £200k from 6/4/2016 then this will be the case. It may be different if this was taken when the LTA was at a higher amount. It is 25% of the protected LTA used at 5th April 24 that is the default deduction. This may or may not be higher than the actual amount paid.

If possible can we have a look at example of LSDBA calculation or that would be another session?

There was an example of this in the scheme specific tax free cash case study. Read about LSDBA here.

If an individual with a pre-commencement pension was applying for a TTFAC the February HMRC newsletter and PTM174300 suggests you can use the monetary amount of TFC paid. Can you just confirm that this has now been changed to 25% of the deemed LTA usage now.

Yes, it has..

Do all LTA used include small pots?

No, small pots neither required or used LSA. In the new regime small pots neither require or use LSA/LSDBA.

In the LTA transitional examples no 3, whereby £1m LTA client received £250k. Does that mean with a Transitional cert client can obtain £18,275 without having to contribute more to pension to do so.

They can obtain a higher LSA of that amount. They would need an uncrystallised pot of £73,100 to make use of this extra LSA though.

A terminally ill client who has used some TFC - on death £1million plus will be paid as a pension death benefit . Once this goes over the LSDBA total how does this get taxed and on who?

It’s taxed at the marginal rate of tax of the beneficiary(ies).

Hi, presumably there is no benefit in applying for FP16 now (for LSA purposes) if the member has funded their pension after 15 March 2023?

Yes, as the contributions are a cessation event for post 15/3/23 applications

Do small pots TFC count towards the starting LSA?

No.

As no minimum fund value needed to apply for FP16, should clients apply irrespective of current value e.g. if likely to breach "old LTA" when taking benefits?

If they are eligible then we can’t see any material downside – only upside. But they would need funds to support the higher allowances or it would be pointless.

How do you think HMRC are going to define 'income' as opposed to a lump sum?

As they always have. If it is from drawdown or annuity it is income – regardless of size or frequency. Taking 100% of a beneficiaries drawdown pot in one go is not a lump sum, it’s a drawdown income payment. If this was from a member who died under 75 and the benefits are settled within 2 years of the scheme becoming aware of the members death then this will be income tax free.

A lump sum payment is a provider paying a death benefit directly to a recipient.

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