Removal of the lifetime allowance: what this means for your clients’ retirement

The lump sum allowance

The LSA caps tax-free lump sums a client can take to £268,275 unless they have transitional protection or qualify for a serious ill health lump sum.   

The maximum tax-free lump sum available from any pension is still limited, in most cases, to the lower of 25% of the pension value being taken, the available LSA or the available LSDBA. 
 

The lump sum and death benefit allowance

The LSDBA caps the tax-free lump sums a person can access during their life and the tax-free lump sum benefits paid on their death to £1,073,100. The LSDBA may be more than this if a client has transitional protection. 
 

Lifetime allowance transitional protections 

Any clients with lifetime allowance transitional protection will instead have the following: 

	Lump sum and death benefit allowance	Lump sum allowance
Fixed Protection 2012	£1.8m	£450,000
Fixed Protection 2014	£1.5m	£375,000
Fixed Protection 2016	£1.25m	£312,500
Individual Protection	Equal to the individual protection	25% of the individual protection
Enhanced Protection  (without lump sum protection)	The value of an individual’s uncrystallised rights on 5 April 2024	£375,000
Enhanced Protection (with lump sum protection)	The value of an individual’s uncrystallised rights on 5 April 2024	The value of tax free lump sum available from each pension on 5 April 2023
Primary Protection (without lump sum protection)	£1.8m multiplied by their primary protection factor	£375,000
Primary Protection (with lump sum protection)	£1.8m multiplied by their primary protection factor	Value of the individual’s lump protection x 1.2

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Scheme specific tax-free cash 

HMRC are introducing new legislation so that from 6 April 2024 the formula for calculating tax-free rights under scheme specific tax-free cash will be simplified. It means clients with fixed or individual protection will now be entitled to more tax-free lump sums than before 6 April 2024. Part of the formula shown in bold is changing to a fixed amount of 0.7154, rather than using the protected amount divided by £1.5m.  

HMRC are also introducing legislation to confirm when clients take scheme specific tax-free cash, or stand-alone lump sums, only 25% of the total pension value is reduced from the LSA. However, the full tax-free value paid will be deducted from the LSDBA.
 

Transitioning from the lifetime allowance 

Many clients will have started to access their pensions prior to 6 April 2024 and have further benefits to access. Where someone used 100% of the lifetime allowance then their LSA and LSDBA will both be nil, otherwise, for each benefit crystallisation event (BCE) that occurred before 6 April 2024 the LSA and LSDBA will be reduced. 

The LSA is reduced by an amount equal to 25% of the lifetime allowance previously used. 

The LSDBA is reduced by 100% of serious ill health lump sums or death benefit lump sums paid before 6 April 2024, or 25% of any other BCE.
 

Transitional tax-free amount certificate (TTFAC) 

Where clients have not taken the maximum tax-free lump sums available at previous BCEs, rather than using the standard approach above, they may be entitled to additional tax-free lump sums by applying for a transitional tax-free amount certificate.  

The requirement for this certificate is a result of going from a percentage-based system under the LTA to a monetary system. Previously it didn’t matter how a client took their benefits, but now it does.  

The clients that could benefit from a transitional tax-free amount certificate include those who:

• Were unable to access any tax-free lump sum due to underfunded GMP. 
• Did not wish to commute DB income for tax-free cash. 
• Were entitled to guaranteed annuity rates (GARs) and maximised their income.  
• Transferred benefits to a QROPS scheme.  
• Are aged over 75 and have unused benefits that were tested as a BCE at age 75.  

It could be detrimental for some clients to apply for a transitional tax-free amount certificate. Such as where someone: 

• took tax-free lump sums when the LTA was greater than the LTA of £1,073,100.
• has taken scheme specific tax-free cash. 

In these scenarios it may mean the actual amount paid is more than 25% of the current LTA. Some people therefore could have a lower tax-free entitlement using a transitional tax-free amount certificate. So, your advice will be important here. 
 

How to obtain a TTFAC 

To get a transitional tax-free amount certificate, you will need to obtain evidence of the clients previous BCEs to clearly evidence what, if any, tax-free lump sums were paid.  

Where it is apparent the client may benefit, this evidence should be provided to the first scheme the client wants to access benefits from after 6 April 2024, that scheme will consider the evidence and, where suitable, provide a transitional tax-free amount certificate. 

Schemes have up to three months to provide a transitional tax-free amount certificate, so you may want to factor this into any retirement planning.  

The certificate confirms the actual tax-free lump sums taken prior to 6 April 2024. To take advantage of the tax-free lump sums made available by using the certificate clients would need to have available uncrystallised funds.
 

Restrictions on applying for a TTFAC 

Individuals whose only pensions in payment are pre-commencement pensions and have had no BCEs between 6 April 2006 and 5 April 2024, cannot apply for a transitional tax-free amount certificate. Where someone has had one or more BCEs between 6 April 2006 and 6 April 2024, including any notional BCE that took place at age 75, they will be eligible to apply for a transitional tax-free amount certificate.  

It is not possible to apply for a transitional tax-free amount certificate if someone has already had an RBCE from 6 April 2024. 
 

Finally 

These changes mean some clients may benefit by reviewing the pensions they have already taken and applying for a TTFAC to increase the tax-free lump sums they can access. Other clients may wish to delay accessing their benefits until HMRC provide further guidance.  

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