Contents

• Calculating the lifetime allowance previously used amount
• Age 75 benefit crystallisation events
• No transitional protections
• Fixed and individual protections
• Enhanced protection without tax-free cash protection
• Enhanced protection with tax-free cash protection
• Primary protection without tax-free cash protection
• Primary protection with tax-free cash protection
   

Calculating the lifetime allowance previously used amount

Where an individual accessed their pensions or turned 75 between 6 April 2006 and 5 April 2024, will have used a percentage of the lifetime allowance (LTA), shown in a benefit crystallisation event (BCE) certificate. If they have no further pensions to access and are unlikely to accrue further pension benefits, then it won’t be necessary to calculate their transitional position. 

Where an individual takes tax free benefits at a relevant benefit crystallisation event (RBCE) and has used a percentage of the LTA, they need to calculate the ‘lifetime allowance previously used amount’ which is:

‘the amount that would have been the previously used amount for the purposes of section 219 of the Finance Act 2004 if a benefit crystallisation event had occurred immediately before 6 April 2024'.

What this means is the total percentage of the LTA someone has already used is converted to a monetary value based on their LTA immediately before 6 April 2024. For individuals without transitional protection, the standard lifetime allowance of £1,073,100 is used. Those with lifetime allowance transitional protections use an increased lifetime allowance as shown below.

Type of protection	Lifetime allowance immediately before 6 April 2024
Fixed protection 2012	£1,800,000
Fixed protection 2014	£1,500,000
Fixed protection 2016	£1,250,000
Individual protection 2014	Confirmed on protection certificate ranging between (1,250,000 - £1,500,000)
Individual protection 2016	Confirmed on protection certificate ranging between (1,000,000 - £1,250,000) or £1,073,100 if higher

The LTA percentage used is multiplied by the appropriate LTA to produce a monetary figure. From that value 25% is considered to have been paid tax free and is then deducted from the clients LSA. 

For example

The following table shows how to calculate the ‘lifetime allowance previously used amount’ for different transitional protections where an individual has used 80% of their LTA. The Remaining LSA column shows the LSA for that protection minus the previously used amount.

Type of protection	Lifetime allowance previously used amount calculation	Remaining LSA
No transitional protection	25% x (80%x £1.0731m)   = £214,620	£268,275 - £214,620 = £53,655
Fixed protection 2012	25% x (80%x £1.8m)  = £360,000	£450,000 - £360,000 = £90,000
Fixed protection 2014	25% x (80%x £1.5m)  = £300,000	£375,000 - £300,000 = £75,000
Fixed protection 2016	25% x (80%x £1.25m)  = £250,000	£312,500 - £250,000 = £62,500
Individual protection 2014 (certificate confirms £1.35m)	25% x (80%x £1.35m)  = £270,000	£337,500 - £270,000 = £67,500
Individual protection 2016 (certificate confirms £1.1m)	25% x (80%x £1.1m)  = £220,000	£275,000 - £220,000 = £55,000

Age 75 benefit crystallisation events

Where someone turned 75 between 6 April 2006 and 5 April 2024 the pension will have been valued against the lifetime allowance as either a BCE 5, 5A or 5B.

Whether or not these BCEs are included in the standard calculation depends on whether the client has taken any tax-free cash between age 75 and 5 April 2024.

If no tax-free cash has been taken between age 75 and 5 April 2024, then BCE 5, 5A and 5B won’t be included in the standard calculation. But if the client has taken any tax-free lump sums in that period, then the full amount of the BCE will be included in the standard calculation.

Due to this, some clients may find their available LSA is restricted as a result of benefits tested at age 75. Such clients may therefore need to apply for a transitional tax-free amount certificate to maximise the amount of tax-free cash they can take.

Clients that turned 75 after 5 April 2024 won’t have their LSA reduced as a result of turning age 75.

Here are two examples:

 

No transitional protections

Where an individual took benefits between 6 April 2006 and 5 April 2016, the LTA was greater than the final LTA of £1,073,100. The percentage of benefits taken during this period are essentially valued down in line with the reduction to the LTA. As such the reduction to the LSA may be less than the actual tax-free lump sums paid.

Individuals may benefit from a transitional tax-free amount certificate if they took less than 25% tax-free cash at previous BCEs. 

Any benefits taken between 6 April 2016 and 5 April 2020 would have been tested against a lower lifetime allowance than the final lifetime allowance of £1,073,100. The percentage of benefits taken during this period are slightly increased in value in line with the increase in the LTA. As such, the reduction to the LSA may be more than the actual tax-free lump sums paid. If these are the only benefits taken an individual may benefit from a transitional tax-free amount certificate.

 

Fixed protection and Individual protection

Individuals with fixed protection have a protected LTA which remains applicable when valuing any previous BCE’s.

Those with individual protection have an individual lifetime allowance protection confirmed on their protection certificate. Previous BCE’s are valued against this lifetime allowance. 

With both fixed and individual protection, an individual’s LSA will be 25% of their protected LTA. In most cases the amount of tax-free lump sums taken will match the deduction from the LSA. However, where an individual has taken benefits under the LTA before they applied for their protection, then the reduction to the LSA could be more or less than the amount of tax-free cash they received. 

Individuals may benefit from a transitional tax-free amount certificate if they took less than 25% tax-free cash at previous BCEs. 

Follow the calculation as set out above using the appropriate protected lifetime allowance and the percentage of LTA used.

 

Enhanced protection without tax-free cash protection

Individuals with enhanced protection don’t follow the normal transitional rules for valuing previous BCE’s. This is because BCE certificates were issued based on the actual LTA in force at the time, but for tax free cash purposes benefits taken were revalued. 

Calculating the ‘lifetime allowance previously used amount’ means the value of benefits at each BCE are adjusted to reflect the change in SLA since the date of the BCE using the following formula:

•    Value crystallised x CSLA/PSLA
•    CSLA is £1.5M.
•    PSLA is the higher of the standard LTA when the previous BCE occurred or £1.5m.

Where benefits were taken between April 2007 and 2014 the LTA was greater than £1.5m, so the value of benefits taken during this period is valued down. The value of benefits taken since 6 April 2014 will essentially be unadjusted as £1.5m was higher than the LTA for both the current and previous values. 

Each BCE should be revalued using the above approach, and then 25% of the sum of these values is then deducted from the LSA and LSDBA.

Individuals may benefit from a transitional tax-free amount certificate if they took less than 25% tax-free cash at previous BCEs. 

 

Enhanced protection with tax-free cash protection

Individuals with enhanced protection are not subject to the transitional rules valuing previous BCE’s. Instead, the tax-free rights from each pension are now capped to the tax-free amount that was available on 5 April 2023, minus any tax-free lump sums paid from that pension since that date.

Any benefits crystallised before 5 April 2023 are ignored.

It will not be possible or necessary to apply for a transitional tax-free amount certificate as the actual lump sums paid are already considered in this approach. 

 

Primary protection without tax-free cash protection

Individuals with primary protection are not subject to the transitional calculation for previous BCE’s. 

Calculating the lifetime allowance previously used amount means you have to adjust the value of benefits at each BCE to reflect the change in SLA since the date of the BCE using the following formula:

•    Value crystallised x CSLA/PSLA
•    CSLA is £1.5M.
•    PSLA is the higher of the standard LTA when the previous BCE occurred or £1.5m.

Don’t use the percentage of LTA previously used against the standard LTA of £1,073,100 or the underpinned LTA of £1,800,000. Doing so would incorrectly value the previously taken benefits.

Where benefits were taken between April 2007 and 2014, the LTA was greater than £1.5m, so the value of benefits taken during this period is valued down. The value of benefits taken since 6 April 2014 will essentially be unadjusted as £1.5m was higher than the LTA for both the current and previous values. 

Each BCE should be revalued using the above approach, and then 25% of the sum of these values is then deducted from the LSA and LSDBA.

The lifetime allowance previously used amount is capped at £375,000, so the LSDBA will not be reduced by more than this amount. 

Individuals may benefit from a transitional tax-free amount certificate if they took less than 25% tax-free cash at previous BCEs. 

Primary protection with tax-free cash protection

Individuals with primary protection are not subject to the transitional calculation for previous BCE’s. 

Instead the available LSA is equal to an individual’s protected tax-free cash (confirmed on the primary protection certificate) x 1.2, minus: 

• any tax-free cash taken since 6 April 2012, and
• any tax-free cash taken between 6 April 2006 and 5 April 2012 x (£1.8M/standard LTA at the time the tax-free cash was taken)

Each lump sum therefore needs to be calculated individually and then totalled. This total is then deducted from the LSA.

It will not be possible or necessary to apply for a transitional tax-free amount certificate as the actual lump sums paid are already considered in this approach.