Chapter 3 (4 Questions) Flashcards
Tax treatment of member benefits - - Normal minimum pension age (NMPA)
• Earliest benefits can be taken, currently age 55 (before April 2010 it was 50).
• Can be paid to a member before NMPA in certain circumstances.
• Not necessary to retire for benefits but earliest is currently is 55, with some exceptions.
Tax treatment of member benefits - Future increases to the normal minimum pension age - Finance Act 2022
• Increases NMPA to 57 on 6 April 2028 to match increased State pension age (67).
• Exceptions are public sector schemes, e.g., fire fighters, the police and armed forces.
Tax treatment of member benefits - Future increases to the normal minimum pension age - Protection 2028
• An unqualified right is where the member can take their benefits without needing consent.
• For those with unqualified right to take pension at/before 57, so long as in scheme rules on 11 Feb 22.
• Protection carries to new scheme for block transfers otherwise only applies to amount transferred.
Tax treatment of member benefits - Early payment of benefits on ill-health grounds -
HMRC require scheme administrator to have evidence that the member is incapable of continuing their current occupation, both now and in the future, and to have left it as a result. Scheme rules may be stricter. The options available to the member, if certain conditions are met, are:
• a scheme pension; a lifetime annuity; a drawdown pension; a trivial commutation lump-sum payment; a small pots payment; or an uncrystallised funds pension lump sum (UFPLS).
Tax treatment of member benefits - Early payment of benefits on ill-health grounds - Serious ill-health lump sum
• Payment as a lump sum is only possible if the member has a life expectancy of less than one year, in which case it may be possible to pay them as above. This can only be paid out of uncrystallised funds.
• The amount crystallised as a lump sum is tested against the member’s LSA or LSDBA unless a trivial commutation lump- sum payment or small pots payment is made.
Tax treatment of member benefits - Pre-6 April 2006 rights to take benefits before normal minimum pension age -
• Reduced normal retirement ages are no longer available,
• But those with a right to a reduced NMRA due to occupation pre 6 April 2006, can take benefits early.
• If they do so, their LSA and/or LSDBA is reduced by 2.5% for every complete year before normal minimum pension age if a relevant benefit crystallisation event (RBCE) occurs.
Tax treatment of member benefits - Pre-6 April 2006 rights to take benefits before normal minimum pension age - transitional protection
There is transitional protection for deferred or current members of occupational pension schemes who are contractually entitled to take their benefits from age 50. So long as:
• Rules of the scheme allow this, and this provision was in the rules before 10 December 2003,
• All the benefits from the scheme must, however, be taken in full.
• In this case their LSA and LSDBA are not reduced.
Lump sums - Pension commencement lump sum (PCLS) -
A tax-free lump sum which may be available when they start to take their benefits as a scheme pension, a lifetime annuity or a drawdown pension. For the lump sum to be a PCLS:
1. The lump sum entitlement must be connected to an arising entitlement to a ‘relevant pension’ under the same registered pension scheme.
2. Not have used up all LSA or their LSDBA at the time of the payment.
3. Paid within an 18-month period (six months before and twelve months after the member becomes entitled to the ‘relevant pension’.)
4. It must be paid when the member has reached the normal minimum pension age.
5. The amount does not exceed the maximum permitted
If any of these conditions are not met, the payment is an unauthorised payment.
Since a PCLS is a relevant lump sum, it is a RBCE, therefore cannot exceed permitted maximum, limiting PCLS to the lower of:
• ‘the applicable amount’*, which is 25% of the capital value of the benefits coming into payment under the relevant arrangement;
• the member’s available LSA; and
• the member’s available LSDBA.
* Note that disqualifying pension credits are not included when calculating the maximum applicable amount of PCLS.
The monetary amount of each PCLS payment is deducted from member’s LSA and LSDBA on future RBCEs.
Where member has no LTA protection and no lump sum rights in excess of 25% on 5 April 2006, the LSA is a maximum of £268,275.
Lump sums - Pension commencement lump sum (PCLS) - Pension commencement excess lump sum (PCELS)
Where the scheme rules entitle a member to a certain amount of PCLS, but the amount that can be taken is restricted because the member does not have enough LSA left, the excess lump sum can be paid, but is taxable as pension income via PAYE. The member must have no LSA/LSDBA left.
In certain circumstances, a member may be entitled to a higher PCLS. Examples include where the member has primary or enhanced protection or had lump sum rights in excess of 25% on 5 April 2006.
The rules of the scheme will determine the actual PCLS paid.
Lump sums - Uncrystallised funds pension lump sum (UFPLS) -
• Taking of some, or all, of uncrystallised defined contribution pension as a lump sum. It triggers MPAA.
• Typically, 25% of fund taken is tax-free with the rest taxed as the member’s pension income via PAYE.
• Because an UFPLS is both a relevant lump sum and a relevant benefit crystallisation event (RBCE), the tax-free element is tested against the member’s available LSA and counts towards their LSDBA.
• If the member has used all available allowances, the entire UFPLS is taxable as income via PAYE.
The amount that is tax-free depends on the member’s available LSA and LSDBA. It is the lower of:
• 25% of the lump sum;
• the member’s available LSA; or
• the member’s available LSDBA
Lump sums - Small pots payments
-
Defined as those valued at £10,000 or less and payment is not a RBCE. Thus, the member does not need any LSA or LSDBA left and taking one does not use up any LSA or LSDBA. Their payment does not trigger MPAA.
• Taken from uncrystallised benefits: 25% is tax free, 75% taxed as pension income via PAYE.
• Taken from crystallised benefits: entire payment is taxed as pension income via PAYE.
Lump sums - Trivial commutation lump-sum payments
-
A trivial commutation lump sum can be made when:
• individual has benefits in defined benefit or ‘in payment money purchase in-house scheme pension’; and
• the total value of their pension benefits does not exceed the commutation limit of £30,000.
Not an RBCE so is not tested against the member’s LSA or LSDBA, although must have some LSA remaining.
Tax treatment:
• 25% of the payment received is tax free.
• 75% of the payment is taxed as the member’s pension income via PAYE.
• If made in respect of a scheme pension, the entire payment is taxed as pension income via PAYE.
Lump sums - Serious ill-health commutation -
• Registered pension may commute some/all, of an individual’s benefits when serious ill-health.
• A serious ill-health lump sum is a relevant lump sum and a RBCE.
• Its payment does not reduce the member’s LSA, but it is tested against their LSDBA.
• There is no limit imposed on the amount that can be paid as a serious ill-health lump sum.
Member is under age 75
• The payment is made tax-free up to the member’s remaining LSDBA.
• Payments in excess of their remaining LSDBA are taxable as the member’s pension income via PAYE.
Member is over age 75
• The whole serious ill-health lump sum is taxable as the member’s pension income via PAYE
Income - -
Most registered pension schemes pay income in two different ways, although scheme rules may restrict this. A secured pension; or drawdown pension.
Income - Secured pension -
Under this method, income is secured either through a scheme pension or by buying a lifetime annuity.
Income - Secured pension - Scheme pension
Defined contribution - Can offer a scheme pension, but member must be offered the option of buying a lifetime annuity first.
Defined benefit - Can only offer a scheme pension.
Once in payment the scheme pension income is taxed as the member’s pension income via PAYE. It only triggers the MPAA if it is paid directly from a defined contribution arrangement with fewer than eleven other members in receipt of a scheme pension.
Income - Secured pension - Lifetime annuity
May be purchased from a defined contribution pension fund and is taxed as pension income via PAYE.
Drawdown pension - -
Any income taken from a drawdown pension is taxed as the member’s pension income via PAYE.
Drawdown pension - - Capped drawdown
• Only available to members who had already designated funds to capped drawdown prior to 6 April 2015. Receiving an income does not trigger the MPAA.
• Taking an income in excess of 150% of the basis amount automatically changes the capped drawdown to a flexi- access drawdown fund from the day before (to avoid an unauthorised payments tax charge). When this happens, the MPAA applies immediately.
Drawdown pension - - Flexi-access drawdown
• Designating funds into a flexi-access drawdown does not trigger the MPAA.
• This only happens when the member takes a payment, which is taxed as pension income via PAYE.
• Receiving the payment may impact on the amount of tax the individual pays by pushing them into a higher tax band, affecting their personal savings allowance for instance.
How PAYE operates for flexible payments - -
Where HMRC have not issued a tax coding notice applicable to payments from a scheme, the providers must tax the taxable portion of a flexible payment using PAYE on a month one basis, meaning the payment is taxed as a monthly payment. This means that a maximum of 1/12th of the personal allowance and basic rate band is applied to the payment, meaning that too much tax may be paid.
Where the UFPLS (or income from a flexi-access drawdown plan) does not extinguish all the funds in the pension, HMRC will give the scheme administrator an appropriate tax code to operate against future payments in that tax year. This will avoid further over (or under) payments of tax.
Tax treatment of death benefits - -
Death benefits may be paid to a dependant of the member, to a nominee or to a successor.
The scheme rules will define a dependant - and this may be narrower than HMRC’s definition.
Tax treatment of death benefits - - Two-year window
This is the timeframe within which death benefits must be ‘designated’ to an income producing contract or paid as a lump-sum death benefit. It starts from the date the scheme is notified of, or could reasonably be expected to know of, the death.
HMRC use the term ‘relevant two-year period’, rather than the industry’s preferred term of ‘two-year window’.
Lump-sum death benefits - Lump-sum death benefits paid from uncrystallised funds -
When a member dies with uncrystallised funds, the fund that remains can be paid out as an uncrystallised funds lump- sum death benefit to the member’s nominated beneficiary (or beneficiaries). There is no restriction on who they can be.
The payment of an uncrystallised funds lump-sum death benefit is a RBCE. Thus there will be a test against the member’s remaining LSDBA where the:
• member was under age 75 when they died; and
• lump-sum death benefit is paid within the two year window.
Lump-sum death benefits - Lump-sum death benefits paid from uncrystallised funds - Death of the member before age 75
• Fund is designated within two-year window:
o checked against the member’s remaining LSDBA and if it falls within it, it is paid tax free, with any excess taxed as pension income via PAYE. Any excess paid to a trustee or personal representative is subject to the 45% special lump-sum death benefits charge.
• Fund is designated outside the two-year window:
o if paid to a beneficiary it is taxed as pension income via PAYE; if paid to a trustee or personal representative it is subject to the 45% special lump-sum death benefit charge.
o no test against the member’s remaining LSDBA.
Lump-sum death benefits - Lump-sum death benefits paid from uncrystallised funds - Death of the member aged 75 or older
• If paid to a beneficiary, it is taxed as their income via PAYE; if paid to a trustee or personal representative it is subject to the special lump-sum death benefits charge of 45%.
• No test against the members’ remaining LSDBA.
Lump-sum death benefits - Defined benefits lump-sum death benefit -
This is paid by a defined benefit scheme following the death of the member. Its payment is a RBCE so there is a test against the member’s LSDBA where the:
• member was under age 75 when they died: and
• it is paid out within the two year window.
Lump-sum death benefits - Defined benefits lump-sum death benefit - Death of the member before age 75
• Paid within two-year window: not taxed, but tested against member’s remaining LSDBA. Any excess paid:
o directly is taxed as the recipient’s pension income via PAYE;
o to a trustee/personal representative subject to 45% special lump-sum death benefits charge.
• Paid outside the two-year window: if paid to a beneficiary taxed as their pension income via PAYE; if paid to a trustee or personal representative then it is subject to the special lump-sum death benefits charge of 45%.
• There is no test against the member’s LSDBA.
Lump-sum death benefits - Defined benefits lump-sum death benefit - Death of the member aged 75 or older
• No test against member’s remaining LSDBA.
• If paid to a beneficiary, taxed as their pension income via PAYE. If paid to a trustee or personal representative, it is subject to the special lump- sum death benefits charge of 45%.
Lump-sum death benefits - Annuity protection lump-sum death benefits and pension protection lump-sum death benefits -
Only where the scheme pension or lifetime annuity included a protected capital lump sum, will a lump-sum death benefit be paid when a member dies after securing benefits. Such protected capital lump sums are known as:
Scheme pension from a defined benefit scheme
• a pension protection lump-sum death benefit.
Scheme pension or a lifetime annuity from a defined contribution scheme
• an annuity protection lump-sum death benefit.
Note that any PCLS taken before 6 April 2024, will be subtracted from the member’s LSDBA if other lump-sum death benefits are taken.
Lump-sum death benefits - Annuity protection lump-sum death benefits and pension protection lump-sum death benefits - Both annuity and pension protection
There are no restrictions on who the lump sum can be paid to.
The payment of a pension protection lump-sum death benefit or an annuity protection lump-sum death benefit is a RBCE if paid from funds that crystallised on or after 6 April 2024. If this is the case, there is a test against the member’s remaining LSDBA where the member was under age 75 when they died.
Lump-sum death benefits - Annuity protection lump-sum death benefits and pension protection lump-sum death benefits - Death of the member before age 75 and scheme pension/ lifetime annuity crystallised before 6 April 2024
• Not subject to tax.
• No test against member’s LSDBA as was tested against their lifetime allowance before 6 April 2024.
Lump-sum death benefits - Annuity protection lump-sum death benefits and pension protection lump-sum death benefits - Death of member before age 75 and scheme pension/ lifetime annuity crystallised on or after 6 April 2024.
• Payment subject to a check against member’s remaining LSDBA. Any within it is paid tax- free. Any excess is taxed as recipient’s pension income via PAYE if paid directly; if paid to trustee/personal representative it is subject to 45% special lump -sum death benefits charge.
Lump-sum death benefits - Annuity protection lump-sum death benefits and pension protection lump-sum death benefits - Death of the member aged 75 or older
• If paid to a beneficiary, taxed as their pension income via PAYE; if paid to a trustee/personal representative, it is subject to the special lump- sum death benefits charge of 45%.
Lump-sum death benefits - Lump-sum death benefits paid from a drawdown pension (flexi-access or capped) -
On the death of the member (or subsequent dependant, nominee or successor) a drawdown pension fund can be paid out as a lump sum. There are no restrictions on who a lump-sum death benefit can be paid to.
Note: Only those who set up or inherited a capped drawdown pension before 6 April 2015 can have one. Anyone setting up or inheriting a drawdown pension since then can only have a flexi-access drawdown pension.
The tax treatment can be summarised as follows (note: previous hold can be the member, dependant, nominee or successor).
Note: Any PCLS taken from funds crystallised before 6 April 2024, will reduce the amount of LSDBA the member has remaining.
Note too, that where the lump-sum death benefit is paid in respect of a deceased dependant, nominee or successor it is tested against their available LSDBA – not that of the original member. There is no test against anyone’s LSDBA where it is paid from funds crystallised before 6 April 2024.
Lump-sum death benefits - - Death of the previous holder in drawdown before age 75. Funds crystallised into drawdown before 6 April 2024
• Not taxed if paid within two year window.
• Paid outside it, where the payment is made:
o direct to the beneficiary – taxed as their pension income via PAYE;
o to a trustee/personal representative – subject to 45% special lump-sum death benefit charge.
• No test against previous holder’s LSDBA as already tested against member’s lifetime allowance before 6 April 2024*.
Lump-sum death benefits - - Death of the previous holder in drawdown before age 75. Funds crystallised into drawdown on or after 6 April 2024
• Designated to provide a lump sum within the two year window: checked against previous holder’s remaining LSDBA. If within it, paid tax free.
o Any excess is taxable when paid directly to a beneficiary as their pension income via PAYE. If paid to a trustee/ personal representative it is subject to the 45% special lump-sum death benefit charge.
• Designated to provide a lump sum outside the two year window:
o Where paid directly to a beneficiary it is taxed as their pension income via PAYE. Where paid to a trustee/personal representative, it is subject to the 45% special lump-sum death benefit charge.
o No test against previous holder’s remaining LSDBA
Lump-sum death benefits - - Death of the previous holder in drawdown age 75 or older
• When paid directly to the beneficiary, the payment is taxable as their pension income via PAYE. Where paid to a trustee/personal representative, it is subject to the 45% special lump-sum death benefit charge.
• There is no test against the previous holder’s remaining LSDBA.
Lump-sum death benefits - Trivial commutation lump-sum death benefits -
There are two occasions when a trivial commutation lump- sum death benefit may be paid:
• a survivor commutes a survivor’s annuity or scheme pension; or
• a member dies within the guarantee period of a lifetime annuity or scheme pension they are receiving and the recipient of the guarantee wishes to commute the remaining payments.
In both cases the maximum amount that can be paid as a trivial commutation lump-sum death benefit is £30,000.
Any lump-sum death benefit over £30,000 is not a trivial commutation lump-sum death benefit and may be an unauthorised member payment and taxed accordingly.
The payment of a trivial commutation lump-sum death benefit is not a RBCE. Therefore, its payment does not use up any of either the deceased member’s or the recipient’s LSDBA.
Regardless of how old the member was when they died, or the type of pension concerned, it is always taxed as the recipient’s income via PAYE.
Lump-sum death benefits - Charity lump-sum death benefits -
A charity lump-sum death benefit can be paid following the death of the member or the death of a survivor.
It can be paid when a member dies without surviving dependants or when a survivor dies and there are no surviving dependants of the member.
The lump sum must be paid to a charity:
• nominated by the member or the deceased beneficiary who held the drawdown pension; and
• registered with the Charity Commission for England and Wales, or its Scottish or Northern Ireland counterparts.
If these conditions are met, it is paid tax-free and there is no tax charge on the charity so long as it is used for charitable purposes.
A charity lump-sum death benefit is not a relevant lump-sum death benefit and so is not a RBCE. Therefore, it does not use up any of either the deceased member’s or deceased beneficiary’s LSDBA (as long as the conditions we’ve just outlined are met).
Death benefits paid in the form of a continuing income - -
Note: In this section you will see that there is no test against the member’s (or dependant’s, nominee’s or successor’s)
LSDBA on death before the age of 75. This is because
only relevant lump-sum death benefits are tested against the LSDBA, not death benefits paid in the form of a continuing income.
Death benefits paid in the form of a continuing income - Guarantees -
HMRC place no restrictions on who can receive the payments under a guarantee.
Guarantee is in respect of a scheme pension
• No test against the member’s remaining LSDBA.
• Taxed as the recipient’s pension income via PAYE.
Guarantee is in respect of a lifetime annuity and annuitant dies before age 75
• No test against the LSDBA.
• Is free of income tax.
Guarantee is in respect of a lifetime annuity and annuitant dies aged 75 or older
• No test against the LSDBA.
• Taxed as recipient’s pension income via PAYE.
Death benefits paid in the form of a continuing income - Dependant’s scheme pension -
It is possible to set up a scheme pension so that it will pay an income to a dependant (only) of the member after the member’s death. This is a dependant’s scheme pension.
The income is taxed as the dependant’s pension income via PAYE.
Death benefits paid in the form of a continuing income - Survivor’s annuity -
An annuity purchased by the member can be written as a joint life annuity with the contingent interest being paid to either a dependant or a nominee.
Member dies before age 75- and first-income payment is received by the survivor on or after 6 April 2015
• No test against the LSDBA.
• Free of income tax.
Member dies aged 75 or older
• No test against the LSDBA.
• Taxed as the recipient’s pension income via PAYE.
Annuity bought by a dependant or nominee: can be bought from either uncrystallised or undrawn funds, on the death of the member.
Annuity bought by a successor: can only be from undrawn funds, on the death of the dependant or nominee.
Member dies before age 75 with uncrystallised funds which are then used to purchase a dependant’s or nominee’s annuity
• Entitlement arises within the two-year window: free of income tax.
• Entitlement arises outside the two year window: taxed as recipients’ pension income via PAYE.
• No test against the member’s remaining LSDBA.
Member dies on or after age 75 with uncrystallised funds which are then used to purchase a dependant’s or nominee’s annuity
• No test against member’s remaining LSDBA.
• Taxed as recipients’ pension income via PAYE.
Previous holder dies before age 75 with undrawn funds which are then used to purchase a dependant’s, nominee’s or successor’s annuity
• No test against previous holder’s remaining LSDBA.
• Income received free of income tax.
Previous holder dies on or after age 75 with undrawn funds which are then used to purchase a dependant’s, nominee’s or successor’s annuity
• No test against previous holder’s remaining LSDBA.
• Income received taxed as recipients’ pension income via PAYE.
Death benefits paid in the form of a continuing income - Dependant’s capped drawdown -
Although it is no longer possible to set up a capped drawdown plan, those already in place on 5 April 2015 can continue.
Dependant’s capped drawdown set up before 6 April 2015 and income commenced prior to 6 April 2015
• Income taxed as recipient’s pension income via PAYE.
Dependant’s capped drawdown set up before 6 April 2015 but no income taken until after this date (and previous holder died under 75)
• No test against member’s remaining LSDBA.
• Free from income tax.
Dependant’s capped drawdown set up before 6 April 2015 but no income taken until after this date (and previous holder died aged 75 or older)
• No test against member’s remaining LSDBA.
• Income taxed as recipient’s pension income via PAYE.
If the dependant in capped drawdown dies, a future successor can only designate the funds into a flexi-access drawdown fund.
Death benefits paid in the form of a continuing income - Dependant’s, nominee’s or successor’s flexi- access drawdown -
A flexi-access drawdown fund is the only option for a nominee or successor who wants to take income via a drawdown pension. There is no limit to the number of times a flexi-access drawdown fund can be passed on.
The tax treatment of income received from drawdown funds inherited by a dependant, nominee or successor (where the first payment is received on or after 6 April 2015), is as follows.
Previous holder in flexi- access drawdown dies before age 75
• Any income is free of income tax.
• No test against the previous holder’s remaining LSDBA.
Previous holder of the flexi-access drawdown dies aged 75 or older
• Income taxed as the recipient’s pension income via PAYE.
• No test against the previous holder’s remaining LSDBA.
Member or dependant dies in capped drawdown before age 75
• Any income is free of income tax.
• No test against the member or dependant’s remaining LSDBA.
Member or dependant dies in capped drawdown aged 75 or older
• Income taxed as the recipient’s pension income via PAYE.
• No test against the member or dependant’s remaining LSDBA.
Where the member dies with uncrystallised funds and the survivor (dependant or nominee) designates these funds to a flexi-access drawdown contract the tax situation is as follows.
Member dies before age 75 with uncrystallised funds, which are then designated into dependant’s or nominee’s flexi-access drawdown
• Any income is free of income tax if designation is made within the two- year window, taxable via PAYE if not.
• No test against the member’s remaining LSDBA.
Member dies aged 75 or older with uncrystallised funds, which are designated into dependant’s or nominee’s flexi-access
• Income taxed as recipient’s pension income via PAYE.
• No test against the member’s remaining LSDBA.
Death benefits paid in the form of a continuing income - Inheritance tax treatment of death benefits -
Lump sum benefits and funds remaining in a defined contribution scheme that are distributed via the member’s expression of wishes are outside their estate for IHT purposes, where the payment is made within the two-year window.
Transitional reliefs - -
When the lifetime allowance (LTA) was introduced on 6 April 2006 (A-Day) its application included benefits built up before then. Some individuals had accrued pension provision by then that was already above or close to the
lifetime allowance. Transitional rules in the form of primary protection and enhanced protection were introduced enabling such individuals to apply to HMRC to protect this higher entitlement.
The LTA reduced after its introduction. Those whose entitlement exceeded the new, lower LTA , could apply for fixed protection and individual protection.
It is no longer possible to register for transitional protection in respect of pre-6 April 2006 rights.
Primary protection - -
Primary protection was for individuals who, on 5 April 2006, had aggregate pension savings (both crystallised and uncrystallised) of over £1.5m and wished to continue to accrue benefits. It works by giving them a higher personal lifetime allowance.
The first step was to work out the primary protection factor using the following formula (rounded up to two decimal places).
value of the individual’s pension rights on 5 April 2006 − £1.5m / £1.5m
Before 6 April 2012, the primary protection factor was then applied to the LTA at the time benefits were crystallised, to provide their personal lifetime allowance. However, due to subsequent reductions in the LTA, since 2012/13 it is applied to the underpinned lifetime allowance of £1.8m.
From 6 April 2024, the LSDBA applies instead of the LTA. A member with primary protection will have an increased LSDBA (before any deductions). This is calculated as:
£1.8 million × the member’s primary protection factor
The main advantage of primary protection before 2023/24 was that contributions could continue to be made, and/or benefits could continue to accrue, after A-Day. Now, subject to certain conditions, continuing contributions and/or benefit accrual are possible under all forms of transitional protection.
When an individual registered for primary protection, they would have received a certificate from HMRC confirming their LTA enhancement factor and the amount of protected tax-free cash, if any.
Primary protection - Primary protection and tax-free cash -
An individual with a right to tax-free case of more than £375,000 as at 5 April 2006 was able to register for primary protection to protect their higher entitlement.
Primary protection - Primary protection and tax-free cash - Protected tax-free cash
This calculation is as follows:
1. The monetary amount of the tax-free cash on 5 April 2006 was indexed in line with increases in the LTA using the underpinned LTA of £1.8m (i.e. multiplied by 1.8m/£1.5m or 1.2).
2. The monetary amount of any tax-free cash taken between 6 April 2006 and 5 April 2012 was indexed in line with increases in the LTA between A-Day and when benefits were taken (i.e. multiplied by £1.8m/PLTA) and deducted.
3. The monetary amount of any tax-free cash taken on or after 6 April 2012 was deducted.
This gives them their protected tax-free cash amount, which determines their LSA.
Note: the acronym PLTA refers to the standard LTA when the tax-free cash was taken. So, if it was taken in 2012/13, the PLTA would be £1.5m – the LTA in force at that time.
Primary protection - Primary protection and tax-free cash - No tax-free cash protection
Anyone with primary protection whose tax-free cash entitlement was less than or equal to £375,000 on 5 April 2006 was able to take a tax-free cash lump sum of up to 25% of £1.5 million, i.e. up to £375,000. The maximum tax-free cash lump sum would be worked out as the lower of:
• 25% × £1.5 million = £375,000;
• 25% of the value of the member’s benefits.
From 6 April 2024, their LSA (before deductions) is £375,000.
The calculation of the tax-free amount available when a lump sum is paid works the same as for someone without protection.
Thus it is the lower of:
This means that the maximum tax-free cash that can be paid is the lower of:
• 25% of the value of the member’s benefits; and
• £375,00 less*
– 25% of the LTA used up by any benefits taken before 6 April 2024; and
– any tax-free cash taken on or after 6 April 2024.
* If any benefits were taken before 6 April 2006, and there were no further BCEs between 6 April 2006 and 5 April 2024, then 25% of the value of these benefits also needs to be deducted.
Enhanced protection - -
This was available to those who had pre-A-Day benefits that had breached or could breach the LTA in the future. It could be lost if any relevant benefit accrual occurred, so the individual must have stopped being an active member of an approved pension scheme by 5 April 2006.
Since 6 April 2023, relevant benefit accrual is permitted without enhanced protection being lost (except in exceptional circumstances). However, there must have been no such accrual between 6 April 2006 and 5 April 2023.
From 6 April 2024, the LSDBA applies instead of the LTA. If a member has enhanced protection, their LSDBA will be the value of their uncrystallised funds on 5 April 2024. The transitional rules to calculate how much needs to be deducted fro the LSDBA for benefits taken before 6 April 2024, do not apply to those with enhanced protection.
Enhanced protection - Enhanced protection and tax-free cash -
As with primary protection, an individual with a right to tax-free cash of more than £375,000 as at 5 April 2006, was able to register for enhanced protection to protect the higher entitlement.
Protected tax-free cash
If they did so, the member’s entitlement to tax-free cash was protected as a percentage of the benefit value at A-Day.
When benefits were taken, the maximum tax-free cash they were able to take was the lower of:
• the protected percentage of their fund when benefits were taken; and
• their protected tax-free cash entitlement on 5 April 2023.
This means that schemes will need to be able to provide members with a valuation of their benefits as at 5 April 2023.
If the value of the member’s benefits:
• increases after 5 April 2023: the tax-free cash entitlement is capped at that which applied on 5 April 2023 (as this will be lower).
• decreases after 5 April 2023: the tax-free cash entitlement is the protected percentage of the fund when they take the benefits (as this will be lower than on 5 April 2023).
The LSA is determined by the member’s protected tax- free cash amount, capped at the amount that could have been paid on 5 April 2023. The member’s enhanced protection certificate confirms what amount can be taken as a percentage of the uncrystallised fund.
Enhanced protection - Enhanced protection and tax-free cash - No tax-free cash protection
Where the pre-A-Day tax-free cash was less than or equal to £375,000, then the maximum tax-free cash was worked out as the lower of:
• 25% × £1.5 million = £375,000; and
• 25% of the value of the member’s benefits.
The important point to note here is that, where there is no lump sum protection, the value of the member’s benefits can include any contributions the member makes on or after 6 April 2023.
From 6 April 2024, a member with enhanced protection with no protected tax-free cash, has a LSA (before deductions) of £375,000. Any benefits previously taken are taken into account in the same way as for primary protection.
Fixed protection - -
As the LTA reduced from 2012, it meant that there were individuals who had built up benefits at, or close to, the higher LTAs. Such individuals could apply for fixed protection.
Fixed protection - Fixed protection 2012 -
Fixed protection 2012
This was introduced when the LTA reduced from £1.8m to £1.5m on 6 April 2012 and is for those who had accrued (or could accrue) pension benefits in excess of £1.5m. It protects their benefits up to £1.8m and enables them to take a PCLS of up to 25% of £1.8m, i.e. £450,000.
For fixed protection 2012 to apply, there must have been no relevant benefit accrual between 6 April 2012 and 5 April 2023.
From 6 April 2023, relevant benefit accrual may recommence without fixed protection 2012 being lost.
Fixed protection - Fixed protection 2014 -
Introduced when the lifetime allowance reduced from £1.5m to £1.25m on 6 April 2014, affecting those who had, or expected to have, pension rights in excess of £1.25m. It protects their benefits up to £1.5m and allows a tax-free cash lump sum of 25% of £1.5m, i.e. £375,000.
For fixed protection 2014 to apply, there must have been no relevant benefit accrual between 6 April 2014 and 5 April 2023.
From 6 April 2023, relevant benefit accrual may recommence without fixed protection 2014 being lost.
From 6 April 2024, a member with fixed protection 2014, has a LSA (before any deductions) of £375,000 and a LSDBA (before any deductions) of £1.5 million. Any benefits previously taken will have to be taken into account.
Fixed protection - Fixed protection 2016 -
Introduced when the LTA reduced from £1.25m to £1m, affecting those who had, or expected to have, pension rights in excess of £1m. It protects their benefits up to a value of £1.25m and allows a tax-free cash lump sum of 25% of £1.25m, i.e. £312,500.
Elections for fixed protection 2016 must be made online and the application deadline is 5 April 2025. Those with primary protection, enhanced protection or either form of fixed protection can not apply for fixed protection 2016.
There must have been no relevant benefit accrual between 6 April 2026 and 5 April 2023. However, from 6 April 2023, if the member registered for fixed protection 2016 before 15 March 2023, relevant benefit accrual may restart without fixed protection being lost.
Anyone successfully registering after this date, will lose the protection if there is any relevant benefit accrual after 6 April 2012, 2014 or 2016, depending on which fixed protection they have.
A member with fixed protection 2016 has a LSA (before deductions) of £312,500 and a LSDBA (before deductions) of £1.25m. Benefits previously taken need to be taken into account.
When an individual registered for any of the fixed protections, they would have received a certificate from HMRC confirming the level of protection awarded.
Individual protection - Individual protection 2014 -
Individual protection 2014 is for individuals without primary protection (though they could have enhanced or fixed protection) who had pension savings in excess of £1.25m on 5 April 2014. Their pension savings are valued on that date and this becomes their protected LTA, up to a maximum of
£1.5m (known as the relevant amount). Applications had to be made by 5 April 2017.
The protected LTA would be between £1.25 million and £1.5 million and the maximum tax-free cash lump sum was 25% of this, so between £312,500 and £375,000. This gave them a:
• LTA (before deductions) of 25% of the relevant amount (between £312,500 and £375,000); and
• LSDBA (before deductions) of the relevant amount (so between £1.25 million and £1.5 million).
Any benefits previously taken will need to be taken into account.
For individual protection 2014, the relevant amount is the lower of:
• value of the member’s benefits on 5 April 2014 (which must be a minimum of £1.25 million); and
• £1.5 million.
Individual protection - Individual protection 2016 -
Introduced when the lifetime allowance reduced to £1m on 6 April 2016, individual protection 2016 gives an individual whose pension savings were valued in excess of that, a protected LTA equal to their pension savings on 5 April 2016 (up to a maximum of £1.25m). It works in the same way as individual protection 2014.
Elections for individual protection 2016 must be made online and the application deadline is 5 April 2025.
However, the statutory obligation to provide a valuation only applied for four years, and it may no longer be possible to get a valuation as at 5 April 2016. If it is not, it will also no longer be possible to apply for individual protection 2016.
Someone with individual protection 2016 has a:
• LSA (before deductions) of 25% of relevant amount (so between £268,275 and £312,500); and
• LSDBA (before deductions) of the relevant amount (so between £1,073,100 and £1,250,000).
Any benefits previously taken will need to be taken into account.
Pension sharing – impact of transitional protection on allowances - Pension debits as a result of a pension sharing order - Enhanced protection
Pension debit has no affect. If applied for before 15 March 2023, ex-spouse can now rebuild their pension.
Pension sharing – impact of transitional protection on allowances - Pension debits as a result of a pension sharing order - Primary protection
Value of pension debit subtracted from value of funds on 5 April 2006. This may reduce their value below £1.5m causing them to lose the protection. If registered for tax-free cash protection the LSA is unaffected by the pension debit unless the protection is lost.
Pension sharing – impact of transitional protection on allowances - Pension debits as a result of a pension sharing order - Fixed protection
Pension debit has no affect. If applied for before 15 March 2023, ex-spouse can now rebuild their pension.
Pension sharing – impact of transitional protection on allowances - Pension debits as a result of a pension sharing order - Individual protection
Pension debit reduces their enhancement factor. However, the size of the pension debit can be reduced by 5% for each complete tax year:
• after 2013/14 for individual protection 2014, if the debit is after 5 April 2015;
• after 2015/16 for individual protection 2016, if the debit is after 5 April 2015.
Pension sharing – impact of transitional protection on allowances - Pension credits as a result of a pension sharing order - Enhanced protection
Pension credit usually has no affect so long as application accepted before 15 March 2023. If accepted after that date:
• lost if new arrangement is set up to receive the credit;
• not lost if pension credit was paid into an existing pension arrangement.
Pension sharing – impact of transitional protection on allowances - Pension credits as a result of a pension sharing order - Primary protection
Pension credit is from an uncrystallised pension or one already in payment before 6 April 2006: no change. LSA and LSDBA not affected. Pension credit is from a pension that came into payment between 6 April 2006 and 5 April 2024 an enhancement, the pension credit factor, can be applied for.
Pension sharing – impact of transitional protection on allowances - Pension credits as a result of a pension sharing order - Fixed protection
Not usually affected by receiving a pension credit so long as application accepted before 15 March 2023. If pension credit is from a pension that came into payment between 6 April 2006 and 5 April 2024 an enhancement, the pension credit factor, can be applied for. This increases their protected LSDBA. If from an uncrystallised pension or a pension already in payment before 6 April 2006, no change to the fixed protection.
Pension sharing – impact of transitional protection on allowances - Pension credits as a result of a pension sharing order - Individual protection
If pension credit comes from an uncrystallised pension or a pension already in payment before 6 April 2006: not change to the individual protection. Pension credit is from a pension already in payment and their entitlement arose after 5 April 2006 an enhancement, the pension credit factor, can be claimed. This increases their LSDBA but has no affect on their LSA.
Pension sharing – impact of transitional protection on allowances - Scheme specific tax-free cash protection -
It was possible with some pre-A-Day regimes to accrue a tax-free cash lump sum greater than 25% of the member’s benefits at 5 April 2006.
In 2024/25, the rules for those in this situation are:
• such individuals can protect their enhanced tax-free cash entitlement without applying to HMRC;
• the onus falls on the existing scheme, which must record the member’s entitlement to PCLS on an ongoing basis;
• if benefits are transferred after A-Day it is lost unless the transfer is a bulk transfer or is because an occupational pension scheme has been wound up;
• the member must have some LSA available; and
• the member must not have tax-free cash protected through primary or enhanced protection.
– They may be eligible if their tax-free cash rights at 5 April 2006 exceeded 25% of the value of the benefits, but not £375,000.
Transitional protection is automatic for members of an occupational pension whose entitlement exceeded 25% on 5 April 2006. However, all benefits must come into payment at once or the entitlement is lost.
To calculate if the tax-free cash under an arrangement exceeds 25% of the uncrystallised rights, divide the value of the member’s uncrystallised lump sum rights on 5 April 2006 by the total value of their uncrystallised rights on 5 April 2006.
The scheme specific tax-free cash is calculated as:
• the lump-sum entitlement on 5 April 2006 multiplied by 1.2; plus
• 25% of the growth in the fund since A-Day.
Pension sharing – impact of transitional protection on allowances - Scheme specific tax-free cash and the LSA and LSDBA - LSA
In most situations, the full amount of the tax-free cash counts towards the member’s LSA. However, where there is scheme specific tax-free cash, only 25% of the benefits crystallised will count towards the member’s LSA. The excess of tax-free cash above that can be ignored.
Pension sharing – impact of transitional protection on allowances - Scheme specific tax-free cash and the LSA and LSDBA - LSDBA
For the purpose of testing scheme specific tax-free cash against the LSDBA, the full amount of tax-free cash paid is taken into account.
Standalone lump sums - -
Before 6 April 2006 it was possible for a member to take all their benefits as a tax-free cash lump sum known as a standalone lump sum. This is not a PCLS as there is no requirement to link it to a pension.
To be a standalone lump sum, the member must:
• have reached normal minimum pension age (or earlier protected pension age or fulfill ill-health early retirement criteria);
• receive all the benefits;
• have had no benefit accrual after 5 April 2006;
• not have enhanced or primary protection with protected lump sum rights; and
• the lump sum must be 100% in all their arrangements under the scheme(s) of the same employment.
The tax-free element of the standalone lump sum is limited to the value that could have been paid on 5 April 2023, with any excess taxed as income via PAYE.
Standalone lump sums - Standalone lump sums and the LSA and LSDBA - LSA
If the member has:
• registered tax-free cash rights under primary or enhanced protection and the tax-free cash entitlement under all schemes on 5 April 2006 was 100% – all the tax-free cash paid counts towards the LSA;
• none of this, only 25% counts towards the LSA.
Standalone lump sums - Standalone lump sums and the LSA and LSDBA - LSDBA
When testing scheme specific tax-free cash against the LSDBA, the full amount of the tax-free cash paid is taken into account.
Transitional protection and automatic enrolment - -
Before 6 April 2023, if an employer believed that a worker had transitional protection, which would be invalidated by being automatically enrolled, they could exempt them from the auto-enrolment requirements. As contributions no longer invalidate such protection, these workers can now be re- admitted.
Transitional protection and automatic enrolment - Transitional tax-free amount certificates (TTFAC) -
The standard transitional basis method of reducing the LSA and LSDBA to take account of benefits taken before 6 April 2024, disadvantages members who did not take tax-free lump sums equal to 25% of their LTA usage.
Where the member can evidence that the tax-free cash taken before 6 April 2024 came to less than 25% of the amount
of LTA used, it is sensible for them to apply to their pension scheme for a transitional tax-free amount certificate (TTFAC). This will certify the amount to be deducted from their LSA and LSDBA.
However, note the following. A member who:
• only has a pre-commencement pension in payment (i.e. a pension(s) in payment that started before 6 April 2006) is not eligible to apply for a TTFAC; and
• has a pre-commencement pension in payment and has had one or more BCEs between 6 April 2006 and 5 April 2024 is eligible to apply for a TTFAC.
A member who holds a TTFAC has their LSA and LSDBA reduced by the actual tax-free amounts taken. Where this is less than 25% of their LTA usage, they will have an increased LSA and/or LSDBA. This can sometimes be the case where the member has already used 100% of their LTA.
The only way to be sure whether applying for a TTFAC is worthwhile for a particular individual, is to do a full analysis of whether the standard transitional basis or holding a TTFAC will give them a higher LSA and/or LSDBA.
The following should be noted:
• once obtained, a TTFAC cannot be cancelled, even if it disadvantages the member; and
• the TTFAC must be issued before any post-6 April 2024 RBCE occurs (which includes a regular payment from a phased drawdown plan).
Transitional protection and automatic enrolment -
Applying for a TTFAC -
A TTFAC can be applied for by the:
• member; or
• their personal representative if the member is deceased.
The member or their representatives, can make the application to either the:
• registered pension scheme under which they crystallised pension benefits under LTA regime; or
• scheme under which they expect to have their first RBCE after this date.
This means that once a member has incurred a RBCE they can no longer apply for a TTFAC.
The applicant must submit complete evidence of the total percentage of LTA used to enable the scheme administrator determine the percentage of benefits taken as tax-free lump sums. Not having enough evidence is the only grounds on which a scheme administrator can refuse to grant a TTFAC.
On receiving an application from a member or their representatives, the scheme must either:
• issue a certificate; or
• provide a notice of refusal before the end of the three- month period starting from the date it received the application.
If the scheme administrator asks for more information the member, or their representatives must reply within three months of the application date.
The certificate must have been issued before the first post-5 April 2024 RBCE for it to be used to determine the member’s LSA and LSDBA.
There is a potential £3,000 penalty for fraud.
There is no set format for a TTFAC, but it must contain the following information. The:
• member’s name, address and NI number;
• percentage of the standard LTA the member has used;
• member’s lump sum transitional tax-free amount as calculated by the scheme administrator; and
• member’s lump sum and death benefit transitional tax-free amount as calculated by the scheme administrator.
If the tax-free amounts on the certificate are incorrect, they should be recalculated using the standard transitional calculation.
This applies regardless of whether:
• the error is identified by the scheme administrator; or
• the certificate has been cancelled.
This may mean that the member has additional income tax to pay.
If the certificate is inaccurate and cancelled by the scheme administrator, the member can reapply for a certificate if no RBCE has occurred.
Tax treatment of pension fund investments - -
The taxation of registered pension scheme investment funds is as follows.
• no liability to income tax arises in respect of income derived from investments or deposits;
• no CGT arises on gains and there is no allowance for losses; and
• trading income is taxable.
Unauthorised payments - -
HMRC rules define payments that can be made without tax penalties. These are authorised payments and unauthorised payments are simply those that are not authorised.
Authorised member payments are any member payment detailed in HMRC regulations, such as:
• pension or lump-sum payments at retirement;
• pension or lump-sum death benefits;
• recognised transfers; or
• administration payments.
Authorised employer payments are any employer payment detailed in HMRC regulations, such as:
• authorised surplus payments;
• compensation payments;
• authorised employer loans; or
• scheme administration payments.
Unauthorised payments - Unauthorised payments charge -
It is levied at a rate of 40% and works as follows.
Unauthorised member payment - made while the member is alive – member is liable for the charge even if the payment is made to someone else; made after the member’s death – the recipient is liable for the charge.
Unauthorised employer payment - the sponsoring (or former sponsoring) employer that received the payment, or in respect of which the payment was made, is liable.
This charge also applies to prohibited assets held by a scheme pension, e.g. a residential property.
The unauthorised payments surcharge applies when the value of all unauthorised payments in a year exceed or equal the surcharge threshold. These are known as surchargeable unauthorised payments and may be in respect of the member or the employer.
The surcharge threshold is reached if the unauthorised payments exceed 25% of the value of the member’s pension rights under the scheme (in respect of a member) or 25% of the value of the pension scheme’s assets (in respect of an employer).
The unauthorised payments surcharge is an additional income tax charge of 15%, payable on top of the unauthorised payments charge.
The scheme sanction charge is paid at 40% of the chargeable payment when a scheme administrator makes at least one chargeable payment in a year. Where the recipient of the unauthorised payment has paid the unauthorised payment charge, it is reduced by the lower of:
• the amount of the unauthorised payments charge that has been paid; or
• 25% of the scheme chargeable payments that are ‘tax paid’.
A scheme chargeable payment is ‘tax paid’ if all, or part, of the unauthorised payments charge due has been paid.
The scheme administrator must pay a de-registration charge of 40% of the total value of the fund immediately HMRC withdraws registration of a registered pension scheme.
Tax treatment of overseas pension schemes - -
These schemes fall into two broad categories.
Qualifying recognised overseas pension schemes (QROPS) - These are schemes based in a HMRC recognised jurisdiction that can receive transfers from registered pension schemes as authorised payments. They must meet HMRC conditions and provide benefits similar to a UK registered scheme.
Currently relieved non-UK pension schemes - These are schemes where UK tax relief has been given on or after 6 April 2006 in respect of pension savings under the scheme.
Collectively these schemes are known as relevant non-UK schemes (RNUKS).
Tax treatment of overseas pension schemes - Qualifying recognised overseas pension schemes (QROPS) -
To be a qualifying recognised overseas pension scheme (QROPS) a scheme manager must notify HMRC that the scheme meets the conditions to be a recognised overseas pension scheme (ROPS).
An overseas pension is a ROPS if it is set up and regulated and/or recognised for tax purposes in:
• a Member State of the EEA, Norway, Iceland and Liechtenstein; or
• a country or territory (other than New Zealand) with which the UK has a double taxation agreement; or
• any other country/territory (including New Zealand) so long as benefits cannot be paid earlier than allowed in the UK and residents of the country/territory can join it.
AND
• any tax relief available to non-resident members must also be available to member’s who are resident and apply regardless whether they were resident when they joined or during their membership or not.
A ROPS can become a QROPS if the scheme manager gives HMRC certain assurance, including that the minimum pension age for the scheme is 55.
Tax treatment of overseas pension schemes - Transferring a UK pension fund to a QROPS -
A transfer to an overseas pension scheme is an unauthorised payment (and subject to tax charges) unless the receiving scheme is a QROPS.
The overseas transfer allowance (OTA) was introduced from 6 April 2024, following the abolition of the LTA. It limits how much can be transferred to a QROPS without a tax charge.
A transfer to a QROPS does not reduce either the LSA or the LSDBA.
A member’s OTA is the same as their LSDBA. Hence
the OTA is £1,073,100 unless the member has transitional protection. If benefits were crystallised before 6 April 2024, the member’s available OTA is reduced by an amount equal to 100% of their LTA usage.
If the transfer value exceeds the member’s OTA, the excess is subject to a 25% charge, called the overseas transfer charge.
• the excess over the OTA of any transfers to a QROPS;
• onward transfers; and
• non-excluded transfers from UK relieved pension schemes to QROPS requested after 8 March 2017.
QROPS transfers will only be excluded from an overseas transfer charge if, at the point of transfer, they meet at least one of a number of conditions.
Transfers that were requested before 9 March 2017 were automatically excluded from the charge. This excluded status continues to apply to the ‘ring fenced’ funds on onward transfer.
Tax treatment of overseas pension schemes - Member payment charge -
A member payment charge is payable if a QROPS makes a payment from former UK funds which would not be allowed under a UK scheme.
The member tax charges are levied at the same level as
the unauthorised payments tax charge (40%) and surcharge (15%). They are levied on the member regardless of where they are resident at the time of the payment or transfer.
Tax treatment of overseas pension schemes - Overseas pension schemes and the flexibility rules -
To maintain comparability between registered pension schemes and RNUKS, legislation was introduced to:
• ensure that a payment from an overseas scheme that would be an UFPLS if paid from a registered pension scheme, can be taxed as pension income;
• ensure that flexibly accessing the pension triggers the application of the MPAA rules;
• align the tax treatment of pension flexibility.
Tax treatment of overseas pension schemes - Annual allowance -
Where tax relief is given in respect of an individual under migrant member relief, transitional corresponding relief or a double taxation agreement, or under s.307 of the Income Tax (Earnings and Pensions) Act 2003, the annual allowance may apply to the overseas pension scheme for the tax year in question.
In addition, if a member is considered to have accessed their benefits flexibly, the MPAA rules will apply.
