Update on the Abolition of the Lifetime Allowance

Revised legislation was introduced and took effect on the 18 November 2024 but backdated to 6 April 2024.  HMRC also issued further guidance in Pension Scheme Newsletter 165 covering some more of the outstanding issues and confirming processes.   The newsletter states that they are aware of further queries that have not been clarified.  So whilst there is still more to come here is a round up of the latest position.

 

Transitional Tax Free Amount Certificate (TTFAC)

In relation to these there has been a general tidy up of the rules to make them work as expected.

A penalty will now apply where a TTFAC is not issued by the pension provider within the required timeframe.  The TTFAC should also include the member’s previously used lifetime allowance amount.

Once individuals have received their TTFAC they must give a copy of to all pension schemes they are a member of within 90 days.  Although the revised rules take effect from 6 April 2024 the earliest date the 90-day period can begin is 18 November when the regulations were introduced.  For any clients with a TTFAC, you should ensure they are aware of the new requirement. 

Where lump sums are paid by the scheme on reliance of an erroneous TTFAC these will remain an authorised payment.  Any excess above the amount which should have been tax-free is subject to the members marginal rate of income tax

 

Scheme Specific Protected tax-free cash.

The formula has now been updated to correct it so that is works as expected.  Essentially, the revised formula gives individuals exactly the same entitlement as they would have had under the LTA regime.  Within the formula the Individual’s lifetime allowance is now replaced with their Lump Sum and Death Benefit Allowance (LSDBA).

As well as the obvious error in the calculation there was a change that could have been seen as a simplification.  The was in relation to the revaluation of the fund value at A-day.  The initial formula used a fixed factor or 0.7154. Had it remained it would have benefitted those with higher lifetime allowance protections.  HMRC decided this was a mistake and the revised formula reverts back to LSDBA/1.5 in the same way as LTA/1.5 was used previously.

The revised legislation confirms that no Lump Sum Allowance is required to pay the protected tax free cash but the tax free amount is limited to the available LSDBA.

Where protected tax-free cash is taken, the LSA reduces by 25% of the benefits crystallised. The LSDBA reduces by the full value of tax free cash.

 

Age 75 Disregard

Under the initial rules, those who reached age 75 pre-6 April 2024 without having taken their full tax free cash entitlement could have been worse off.  This is because the standard transitional calculation included the age 75 BCE and LTA usage.   There was no allowance for the fact that no tax-free cash was taken at that point.

Individuals could apply for a TTFAC and in most cases this would solve the issue, but many may not have realised the need to.

The 18 November legislation changes correct this by reintroducing the age 75 disregard.  Those who reached age 75 and took no subsequent benefits before 6 April 2024 will revert to the same tax-free entitlement as under the old rules.

However, newsletter 165 confirms that this doesn’t solve the issue in all cases.  Those who reached age 75 prior to 6 April 2024 and crystallised further benefits before 6 April 2024 will still need to apply for a TTFAC to correct the position. 

 

Primary and Enhanced Protection with Tax Free Cash entitlement > £375,000.

Under the original legislation it was not possible to pay out more than £375,000 in tax free cash.   Individuals had the choice of delaying payments or taking up to £375,000 and losing the protection.  This has now been corrected

 

Enhanced Protection and Transfers

 

Enhanced protection values are based on the value of the benefits that could be paid from the arrangement at certain dates ie 5 April 2023 for the LSA and 5 April 2024 for the LSADBA.  Under the initial legislation the enhancements were lost on transfer as technically nothing could have been paid from the new arrangement on those dates.  The 18 November legislative change fixes this.

On transfer the existing scheme will supply the receiving scheme the maximum values.

 

Lump Sum Death Benefits

The revised legislation ensures that lump sum death benefits from funds crystallised pre-6 April 2024 are not tested against the LSDBA.  HMRC’s reason for this is that these benefits will have already been tested under the LTA regime.

 The new rules introduce a new requirement for scheme administrators to report funds crystallised prior to 6 April 2024 and those crystallised after, to ensure the correct values are tested against the LSDBA.

The rules also confirm that any income tax on lump sum death benefits in excess of the available LSDBA are dealt with by personal representatives not the scheme

 

Overseas Transfer Allowance

Under the initial rules the Overseas Transfer Allowance was reduced by the full value of the LTA used pre 2024 ie not just the tax free cash.

The 18 November legislation fixes this by introducing a new ‘adjusted lifetime allowance previously used amount’.  This disregards the original BCE 1, ie the drawdown funds being transferred.