Chapter 1: The main retirement benefit rules Flashcards
Where benefits were taken before 6 April 2024, by how much is the LSA reduced by to take account of this?
By default, the reduction is 25% of the percentage of the lifetime allowance used, regardless of the amount of PCLS actually taken.
So, for example, if 40% of the lifetime allowance had been used, the LSA would be reduced by £107,310 (i.e. 40% × 25% × £1,073,100) giving an LSA of £160,965 (i.e. £268,275 − £107,310).
Why would one apply for a TTAC?
Using the standard calculation, in some circumstances this could mean that the default reduction is greater than the amount actually paid tax free. In other circumstances it could be less.
Those who would have higher remaining LSA and lump sum and death benefit allowance (LSDBA) if the actual tax-free sums paid before 6 April 2024 were used can apply for a transitional tax-free amount certificate to take these into account.
The alternative calculation of the initial LSA and LSDBA uses the actual amounts paid tax free rather than a default percentage of the lifetime allowance.
There are several reasons why using the actual lump sum paid tax-free could produce a different result from the standard calculation:
1/3
The lifetime allowance at the time of crystallisation could be different from the final allowance of £1,073,100.
The lifetime allowance for crystallisations before 6 April 2016 was higher than the final one LTA, so applying the percentage used to the final LTA produces a lower figure than a 25% pension commencement lump sum (PCLS). This means that the standard calculation is likely to be more beneficial to the individual.
Between 6 April 2016 and 5 April 2020, the lifetime allowance was lower than the final one (£1,073,100), leading to a higher figure after revaluation than a 25% PCLS, so using the actual tax-free sum could be beneficial, subject to the effect of any other crystallisations.
There are several reasons why using the actual lump sum paid tax-free could produce a different result from the standard calculation:
2/3
The tax-free PCLS could have been lower or higher than 25% of the total crystallised.
For example:
- It could have been lower than 25% because a defined benefit (DB) scheme gave PCLS, which was a fixed multiple of the initial pension.
- It could have been higher than 25% because of scheme-specific protection.
- There may have been no PCLS taken because a low commutation factor or a guaranteed annuity rate made taking full pension more beneficial, even after tax.
There are several reasons why using the actual lump sum paid tax-free could produce a different result from the standard calculation:
3/3
There may have been a BCE where no tax-free amount was available. For example:
- the individual’s fund was tested against the lifetime allowance at age 75;
- the individual transferred some funds to a qualifying recognised overseas pension
scheme (QROPS); - a pension in payment increased significantly, perhaps because the individual agreed
to exchange future yearly escalation for an immediate pension increase - the individual crystallised a disqualifying pension credit (one derived from a pension
already in payment for their ex-spouse).
What significant tax-free death benefits could be unlocked, by applying for a TTAC, when a person has used 100% of their previous LTA?
If a person has used 100% of their previous LTA, and has no LSA remaining, they may wish to apply for a TTAC to confirm the amount of tax-free lump sums taken and thus their remaining LSDBA.
Kirsten used her full lifetime allowance of £1,500,000 in 2013, taking £375,000 PCLS and putting £1,125,000 in flexi-access drawdown. However, she has £500,000 remaining in an uncrystallised pension.
Certification will not give Kirsten any LSA. However, she can recover LSDBA of 698,100
(i.e. £1,073,100 − £375,000). If she dies under age 75 and her remaining fund is within this LSDBA, the full amount can be paid as a lump sum with no tax charge.
Since the flexi-access drawdown started before 6 April 2024, it is not taken into account.
What is the application procedure for applying for a TTAC?
The certificate must be obtained before the first relevant benefit crystallisation event
(RBCE) after April 2024.
The individual (or the legal personal representative if the individual has died) can make an application to any pension scheme of which they are a member, but it is expected this will normally be the scheme from which they plan to receive their first relevant RBCE.
The individual must provide complete evidence of actual tax-free amounts received before 6 April 2024. The exact evidence is not prescribed but could, for example, include the statements provided by schemes when there were BCEs and bank statements.
The scheme administrator must issue a transitional tax-free amount certificate within
three months from when they receive the required complete evidence. There is no prescribed form for this, but it must include details of the percentage of the standard lifetime allowance used before 6 April 2024 and the calculated amounts of both the LSA and the LSDBA available to the individual.
List three reasons why an individual who only crystallised benefits once between 6 April 2006 and 5 April 2024 might benefit from applying for a transitional tax-free
amount certificate.
- took low or no tax-free cash because their scheme had generous guaranteed annuity rates.
- were in DB schemes but didn’t commute pension for their full tax-free cash entitlement
- took benefits during the four tax years when the LTA was lower than £1,073,100 (i.e. 2016/17 to 2019/20)
Summarise the features of primary protection
Eligibility: Only those who had benefits (crystallised and uncrystallised) valued above £1.5M on 5 April 2006.
Registration deadline: 5 April 2009
Lump sum allowance (LSA):
No registered tax-free cash = £375,000
Registered tax-free cash = the registered amount x 1.2
Lump sum and death benefit allowance (LSDBA): £1.8M + (£1.8M x primary protection factor)
Ongoing funding allowed: Yes
Can protection be lost: Only on divorce. If pension benefits are subject to a pension debit, the enhancement factor has to be recalculated.
Primary protection will be lost if the pension debit reduces the value of the member’s pension rights on 5 April 2006 to a figure that’s below £1.5M.
Though the LTA has been scrapped, why is primary protection still relevant?
New allowances have replaced the LTA and primary protection is still relevant for the purposes of calculating the individual’s ‘lump sum allowance’ (LSA) and ‘lump sum and death benefit allowance’ (LSDBA). These allowances cap the amount of tax-free lump sums that can be paid during the member’s lifetime and on death.
How are pension benefits/rights valued for Primary protection purposes?
DC arrangements = member’s fund value as at 5th April 2006
Uncrystallised DB arrangements = accrued pension x 20 (no reduction for tax-free cash, if tax-free cash value taken is known, actual value is added to calculation)
Crystallised DB arrangements = pension in payment multiplied by 25
How was the enhancement factor for primary protection calculated?
Primary protection was only available to those with total pension rights of more than £1.5M on 5 April 2006
The difference between the value of pension rights on 5 April 2006 (both crystallised and uncrystallised) and £1.5M, as a fraction of £1.5M:
(5 April 2006 value - £1.5M) / £1.5M
The answer was rounded up to two decimal places and increased their LTA accordingly e.g. by 20% (1.8-1.5/1.5) = 0.2. £1.5m x 1.20% = £1.8m
When the LTA dropped below £1.8m the protection applied the factor to £1.8m until such times as the LTA went over £1.8m again (which hasn’t happened) - Underpinned LTA.
The enhancement factor has impact on tax-free cash.
Summarise the features of enhanced protection
Eligibility: Anyone - regardless of the size of their benefits.
Registration deadline: 5 April 2009
Lump sum allowance (LSA):
No registered tax-free cash = £375,000
Registered tax-free cash = capped at the amount that could have been paid on 5 April 2023
Lump sum and death benefit allowance (LSDBA): The value of uncrystallised funds on 5 April 2024
Ongoing funding allowed:
Before 6 April 2023, no ‘relevant benefit accrual’ was allowed.
Since 6 April 2023, relevant benefit accrual can normally recommence without affecting the protection.
Can protection be lost:
Before 6 April 2023, it was be lost if relevant benefit accrual took place, or the individual received an impermissible transfer or made a transfer that was not a permitted transfer, or a new pension arrangement is started for the individual although there are a few exceptions (e.g. to accept a permitted transfer).
Since 6 April 2023, enhanced protection normally cannot be lost.
Under primary and enhanced protection, the level of tax-free cash available depends on…what?
Whether or not tax-free cash rights were registered.
Explain how an individual’s LSA is calculated where they hold enhanced protection and no protected TFC
The initial LSA is £375,000 minus 25% of the total of any previous crystallisations. If the standard lifetime allowance at a crystallisation was over £1.5m (which was the case between 6 April 2007 and 5 April 2012), the payment taken is scaled down. Example:
In tax year 2009/10 when the lifetime allowance was £1.75m, Alison crystallised £280,000, taking PCLS of £70,000. Scaled down PCLS = £280,000 × 0.25 × £1.5m ÷ £1.75m = £60,000
The standard transitional rules apply to take account of benefits paid before 6th April 2024. A Transitional Tax Free Amount Certificate could be applied for to reduce the LSA usage from the standard basis.
Example:
Sandi has Enhanced Protection with no lump sum protection.
She had previously used 40% of the LTA, taking £200,000 as tax free cash.
She therefore has an LSA deduction of £375,000 x 40% = £150,000.
Her initial LSA is £375,000 - £150,000 = £225,000.
As her standard transitional deduction is lower than the actual tax free amounts previously paid she does not apply for a TTFAC.
Explain how an individual’s LSA is calculated where they hold enhanced protection and protected TFC
The standard transitional rules DO NOT apply to those with enhanced protection and protected lump sum rights. The individual is not eligible to apply for a Transitional Tax Free Amount Certificate.
The maximum tax free amount payable from any arrangement is:
1. the maximum amount of a pension commencement lump sum that could have been paid to the individual on 5 April 2023 under the arrangement
less
2.the aggregate of the amounts of any pension commencement lump sums to which the member has previously become entitled under that arrangement after that date.
Example: Jeff has Enhanced Protection.
He had lump sum rights in excess of £375,000 on 5th April 2006 and his certificate shows 20%.
On the 5th April 2023 he had a SIPP with uncrystallised rights of £500,000. It is currently valued at £600,000.
Jeff has a LSA of £500,000 x 20% = £100,000.
He part crystallised £100,000 on 10th May 2024.
His LSA was reduced by £100,000 x 20% £20,000 leaving an LSA of £80,000 for future RBCEs.
What is the key consideration regarding enhanced protection, registered tax-free cash and TTAC
Individuals with registered tax-free cash rights under enhanced protection cannot apply for a TTFAC.
Explain how an individual’s LSA is calculated where they hold primary protection and no protected TFC
The initial LSA is £375,000 minus 25% of the total of any previous crystallisations. If the standard lifetime allowance at a crystallisation was over £1.5m (which was the case between 6 April 2007 and 5 April 2012) the payment taken is scaled down in the same way as for enhanced protection.
Explain how an individual’s LSA is calculated where they hold primary protection and protected TFC
The maximum tax free amount payable from any arrangement is:
The registered tax-free cash multiplied by 1.2 (i.e. £1.8M/£1.5M) less:
any tax-free cash taken from 6 April 2006 to 5 April 2012 x (£1.8M/PLTA), and
any tax-free cash taken from 6 April 2012
where PLTA = the standard LTA at the time the tax-free cash was taken
Example:
Anne had rights under various pension schemes worth £2M on 5 April 2006, with a tax-free cash entitlement of £1M.
Anne took £330,000 tax-free cash in tax year 2008/09 and a further £100,000 in 2020/21.
In tax year 2024/25, Anne decides to take the rest of her benefits.
Her protected tax-free cash is £1.2M (£1M x 1.2).
The tax-free cash taken in 2008/09 was revalued as £360,000 (£330,000 x £1.8M/ 1.65M)
There’s no revaluation of the tax-free cash taken in 2020/21
This means that the maximum tax-free cash that Anne can take in 2024/25 is £740,000 (£1.2M - £360,000 - £100,000).
What is the key consideration regarding primary protection, registered tax-free cash and TTAC
Individuals with registered tax-free cash rights under primary protection cannot apply for a TTFAC.
How is the LSDBA calculated for individual’s who hold Enhanced Protection?
LSDBA is set as the value of their uncrystallised funds on 5 April 2024. The transitional rules to calculate how much needs to be deducted for LSDBA purposes in respect of benefits taken before 6 April 2024 do not apply to those with enhanced protection.
Any death benefits paid from pensions crystallised before 6 April 2024 are not tested against the LSDBA.
The LSDBA is a combined allowance for both lifetime tax-free lump sums and tax-free lump sum death benefits. So, the amount available for lump sum death benefits will be reduced by any tax-free cash amounts the member has taken, including any serious ill-health lump sums.
How are lump sums which exceed a person’s LSDBA taxed?
Lump sum death benefits in excess of the available LSDBA are subject to income tax at the beneficiary’s marginal rate.
How is the LSDBA calculated for individual’s who hold Primary Protection?
LSDBA is set as £1.8M + (£1.8M x primary protection factor).
Any death benefits paid from pensions crystallised before 6 April 2024 are not tested against the LSDBA.
How is an individual’s LSA calculated for those holding Fixed Protection 12/14/16 and Individual Protection 14/16?
the same as for those without lifetime allowance protection but using the relevant protected allowance instead of £1,073,100. The initial LSA is 25% of the protected lifetime allowance minus 25% of any lifetime allowance used at previous crystallisations
What are the protected LTAs of Fixed Protection 12/14/16 and Individual Protection 14/16?
Fixed protection 2012 = £1.8m
Fixed protection 2014 = £1.5m
Individual protection 2014 = Lower of £1.5m and the individual’s entitlement at 5 April 2014
Fixed protection 2016 = £1.25m
Individual protection 2016 = Lower of £1.25m and the individual’s entitlement at 5 April 2016
How is an individual’s LSDBA calculated for those holding Fixed Protection 12/14/16 and Individual Protection 14/16?
The calculation is essentially the same as for those without lifetime allowance protection but using the relevant protected allowance instead of £1,073,100. The initial LSDBA is the protected lifetime allowance minus 25% of any lifetime allowance used at previous crystallisations. However, if a severe ill health lump sum has been paid, 100% of that is deducted.
What protection can still be registered for and what is the deadline?
Fixed and Individual 2016
5 April 2025, before any benefits are taken
Why is it relevant that individual’s can still apply for this protection?
it will increase an individual’s LSA and LSDBA
An individual has an early retirement age due to a special occupation. By how much will their LSA be reduced by if they retire early?
LSA is reduced by 2.5% for each complete year before the NRA of 55.
If an individual retires age 35, this is 19 complete years less than 55.
How are pre-A day in-payment benefits capitalised for LTA purposes?
25:1
THOUGH PRE A-DAY BENEFITS MAY HAVE BEEN TAKEN, IT IS THE IN PAYMENT INCOME AS OF TODAY WHICH IS MULTIPLIED BY 25
Assumes TFC was taken.
During the 2023/24 tax year, how was any benefits in excess of the LTA taxed, if taken as a lump sum?
Taxation of any lifetime allowance excess lump sum, serious ill-health lump sum, defined benefits lump sum death benefit and uncrystallised funds lump sum death benefit above the lifetime allowance changed from a 55% tax charge to taxation at an individual’s marginal rate of income tax.
