Articles - Removing the LTA might mean more pension savers need advice

The standard Lifetime Allowance (LTA) will not apply as a lifetime limit for all pension savings from 06 April 2024. The new system consists of a Lump Sum Allowance (LSA) of £268,275 and a Lump Sum and Death Benefit Allowance (LSDBA) set at £1,073,100 - which might mean some pension savers will need to take time, and potentially get financial advice, to get to grips with the new rules. Taken at face value, it is simple.

 By Dale Critchley, Workplace Policy Manager, Aviva

 The allowances only apply to tax-free lump sums. The LSA is the maximum tax-free cash sum that can be taken at retirement. The LSDBA is the maximum tax-free death benefit that can be paid to beneficiaries if a saver dies before reaching 75 years old.

 These limits are increased where people applied for protections when the LTA was introduced or as it reduced over time. The protections are no longer lost if contributions are paid, or new benefits accrued. This means pension schemes and members will need to maintain records and evidence after the LTA is removed.

 When it comes to taking benefits at retirement, anything above 25% of pension benefits - unless the member has a protected tax-free cash allowance - up to the LSA of £268,275 - unless the saver has a protected LTA - attracts income tax at the recipient’s marginal rate. A Pension Commencement Excess Lump Sum limits the extent to which defined benefit scheme members can commute their pension subject to income tax.

 It gets a little more complicated when transitional arrangements apply.

 There are millions of people who have taken benefits prior to the removal of the LTA and who will go on to take benefits under the new system. Tax rules will not allow someone who has already taken tax free cash to take another £268,275 after the removal of the LTA.

 It seems logical that someone who has already taken £100,000 tax-free cash before 06 April 2024 will have used up £100,000 of their LSA or LSDBA. This is ultimately where pension savers or their beneficiaries might find themselves but the journey to get there is not necessarily straight forward.

 Schemes must assume that the amount of tax-free cash taken is 25% of the standard LTA used before 06 April 2024. This will overstate the tax-free amount taken in some circumstances. For example, if someone did not take their full 25% tax-free allowance or the LTA was less than £1,073,100 when they took their benefits. To avoid this situation, savers or their beneficiaries can provide evidence of the actual tax-free sums taken. They will be provided with a transitional tax-free amount certificate (TTFAC) which confirms the cash that has been taken so their LSA or LSDBA can be accurately calculated.

 Savers who have taken more than the assumed amount should not apply for a TTFAC. For example, someone who took 25% of £400,000 (£100,000) as tax free cash in 2013/14, when the LTA was £1.5 million, would have used 26.66% of the LTA. This will be assumed to be only £71,540(1). By not applying for a TTFAC they benefit from a £28,460 higher LSA or LSDBA.

 When it comes death benefits there are times when a TTFAC should be requested:
 • If 100% of the LTA has been used prior to 06 April the LSDBA will be assumed to be zero, unless a beneficiary requests a TTFAC. In which case only the tax-free lump sums taken will be deducted from the maximum LSDBA.
 • Any serious ill health lump sum paid before 06 April will mean all lump sums are assumed to be a percentage of the full LTA, rather than 25% of it. Which can result in understatement of the remaining LSDBA where TFCS has been taken as well.

 The LSDBA test applies to the payment of lump sums, and not when sums are designated to beneficiary drawdown. It means that regardless of the size of the pension pot, no beneficiary need pay income tax on pension benefits where death occurs before age 75 - so long as their scheme rules allow designation to beneficiary drawdown. Trustees may wish to review their rules to ensure this is the case, and that they are aware of the potential tax implications when distributing death benefits.

 Pension allowance rules can be complex by their very nature. The introduction of new rules, including the new allowances, should prompt those impacted to consider getting regulated advice before taking any pension benefits.
 (1)  26.66% x (£1,073,100 x 0.25) = £71,540

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