From 6 April 2024, the lifetime allowance rules were abolished and replaced with three new allowances – here’s what you need to know if you have either a UK pension scheme or a QROPS. Your pension scheme trustees may contact you suggesting that you might want to apply for a Transitional Tax Free Amount Certificate. Pension rules are complex, so in this article I will attempt to unravel that complexity a little, to help you decide whether you need a Certificate, or not.
Lifetime Allowance (LTA)
Up to 6 April 2024 there was a limit on the total value of pension benefits you could build up throughout your lifetime and generally receive up to 25% tax free. This limit was known as the lifetime allowance (LTA) and was set at £1,073,100 for most people.
Normally, if the value of your pension benefits grew beyond this level, the excess taken was subject to a tax charge. However, from 6 April 2024 the LTA rules were abolished and replaced by the following three new allowances:
Lump Sum Allowance (LSA)
This limits the amount which can be taken out of UK pensions tax free, known as the Pension Commencement Lump Sum(PCLS) and is set at £268,275 for most people (25% of the previous Lifetime Allowance amount of £1,073,100). There are instances, when an individual has transitional Lifetime Allowance protection in place, when more than £268,275 may be available, but the norm is a maximum of £268,275.
Lump Sum and Death Benefit Allowance (LSDBA)
This has been set at the same level as the previous Lifetime Allowance of £1,073,100. For those who don’t have transitional Lifetime Allowance protection, this limits the lump sums that can be paid tax-free on the members death prior to age 75 (different rules apply if you are over age 75).
Where benefits have been taken before 6 April 2024, the £1,073,100 limit is reduced by 25% of the total of benefits already taken. For instance, if a member had a pension value of £1,000,000 and has taken a total of £400,000 prior to death, the remaining LSDBA would be reduced from £268,275 to £168,275.
Alternatively, individuals (or, on death, their legal representatives) who can evidence how much has been paid tax-free before 6 April 2024 may be able to apply for a certificate confirming the amount to be deducted instead. This could, for some, result in a higher available LSDBA.
The LSA is a limit on certain lump sums paid during the member’s lifetime, whereas the LSDBA also includes certain lump sums paid on death before age 75 and serious ill-health lump sums paid before age 75.
As a working example, let’s say you haven’t yet taken any pension benefits and decide you’d like to move £100,000 of your pension into drawdown. Typically, up to 25% of the amount being moved into drawdown can be paid as a tax-free lump sum (PCLS).
Under the new rules – it would be the PCLS (tax-free cash) amount of £25,000 that would use up your LSA and LSDBA.
So, after taking that PCLS, you’d have £243,275 of your LSA and £1,048,100 of your LSDBA left.
The Overseas Transfer Allowance (OTA)
This new allowance covers transfers to qualifying recognised overseas pension schemes (QROPS). A QROPS is a type of overseas pension scheme to which someone can transfer funds from a UK registered pension scheme. This is also set at the amount of the old lifetime allowance – £1,073,100, for most people. It is the amount that the member can transfer to an overseas pension scheme during their lifetime without incurring a tax charge. This is in recognition of the old Benefit Crystallisation Event 8, which limited the amounts that a member could transfer overseas without incurring a lifetime allowance excess tax charge.
NOTE: If pension benefits have been crystallised before 6 April 2024, the individual's available OTA will be reduced by an amount equal to 100% of the value of their LTA already used. I explain more about this here:
Care with QROPS transfers
HMRC have acknowledged that the way the new Overseas Transfer Allowance (OTA) rules have been written is not fair on those wishing to transfer to a QROPS, and whilst they intend to rectify this, to date the rules remain unchanged.
Example 1 - Bob crystallised 75% of his pension fund in 2015, when the lifetime allowance was £1,250,000, placing the 75% into drawdown and taking PCLS (in other words, he moved 75% into drawdown and took 25% PCLS). If he now transfers his pension to a QROPS, the overseas transfer allowance will be reduced by 75% and the value of his pension will be measured against that smaller figure, rather than the full £1,073,100 allowance. So, £1,073,100 x 75% = £804,825 reduction in the overseas transfer allowance. Leaving only £268,275 available now to move to a QROPS without incurring the Overseas Transfer Charge.
If his pension is worth more than £268,275 he is going to exceed the OTA and incur a 25% tax-charge on the excess.
Example 2 – Brian is considering transferring his £500,000 SIPP to a QROPS. Before 6 April 2024 he had used up 65% of his LTA when taking benefits. He has no transitional protection.
To calculate his available OTA, we must make a deduction for the benefits crystallised before 6 April 2024:
Deduction = £1,073,100 x 65% = £697,515
So Michael’s available OTA is £375,585 (£1,073,100 – £697,515).
If he transfers his £500,000 SIPP to a QROPS, £124,415 will be subject to the overseas transfer charge.
The Tax Charge on any excess
Any excess on the LSA or LSDBA will be taxed at either yours or your beneficiaries’ marginal income tax rate. Transfers to QROPS that exceed the overseas transfer allowance will normally be subject to the Overseas Transfer Charge (OTC) of 25%.
Understanding the impact on beneficiaries is also crucial. If you pass away before age 75, lump sums within the allowances are generally tax free. After 75, your beneficiaries will pay income tax at their marginal rate on any benefits they receive.
So, who would benefit from a Transitional Tax Free Amount Certificate?
- Someone who has had a Benefit Crystallisation Event (BCE) where they did not receive a tax-free lump sum. For instance, an Age 75 Test or QROPS transfer where their total pension fund value is between £500,000 and £1,073,100.
- Someone who has had a Benefit Crystallisation Event (BCE) where they took less than a 25% tax-free lump sum. For example, where they exchanged some of their lump sum rights for an increased pension.
- They have utilised 100% or more of their Lifetime Allowance (LTA) but did not take tax-free lump sums equivalent to this amount.
- They had a Benefit Crystallisation Event (BCE) tested against the standard Lifetime Allowance (LTA) when it was less than £1,073,100. The new rules may result in their available lump sum being higher than it was under the old rules.
Who would not benefit from, or cannot apply for a Transitional Tax Free Amount Certificate (TTFAC)?
- Anyone who has already been provided with a TTFAC that has not been revoked.
- A relevant Benefit Crystallisation Event (rBCE) has taken place on or after 6 April 2024 (if you have taken any benefits on or after 6 April 2024 you cannot apply for a Certificate).
- You, or the deceased member, took pension benefits prior to 6 April 2006 and did not take any benefits from 6 April 2006 to 5 April 2024.
- You, or the deceased member, hold valid enhanced protection with lump sum protection over £375,000.
The way the legislation is written means a certificate can give a worse outcome than the standard transitional basis. HMRC have confirmed that once a client receives a certificate, it is irreversible and they must use it even if it is a poorer outcome. Therefore, care needs to be taken before making a request. Should you choose to apply for the Certificate, unless your total pension provision has remained with the same provider for life, you must provide your current pension scheme with complete evidence for each Benefit Crystallisation Event across all pension schemes (all your previous pension schemes that you have transferred during your lifetime).
If you’ve taken pension benefits from 6 April 2006 to 5 April 2024 and been provided with a Lifetime Allowance (LTA) percentage, the HMRC transitional calculation assumes you’ve taken 25% tax-free cash from all of these benefits. If you’ve taken less, you may have more allowance available than using the HMRC transitional calculation assumptions. If you think this could apply to you and think the tax-free elements from all your pension arrangements already paid to you or that you are likely to take in the future will take you close to or above the Lump Sum Allowance (LSA) of £268,275, you should consider applying for a Transitional Tax Free Amount Certificate (TTFAC). Such an application must be made (and the certificate issued) before you receive your first lump sum benefit from a pension arrangement on or after 6 April 2024.
Summary
Our aim is to ensure that you are able to enjoy life while we take care of your finances, ensuring you’re set up in the most tax efficient way for your particular circumstances. If you are considering how best to set up your finances as a resident of Spain please contact us.
Speed Financial Solutions are a highly qualified and regulated financial services provider looking after clients throughout Spain and the UK. Established in 2010, we provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your financial planning.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
Please take a look at our website – www.speedfinancialsolutions.com
For further information contact us on Tel 951 315 271 or 951 318 529
We are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation. Follow us on Facebook for regular updates.
This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
24 September 2024
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