The Lifetime Allowance – gone, but not forgotten

The beginning of a new tax year, coinciding, with the onset of Spring always brings with it the feeling of new beginnings. This time the feeling is particularly apt, as the 2024/25 tax year sees the onset of a whole new set of rules relating to pension planning, arguably the most dramatic changes to the UK pension landscape for over 20 years.

As announced in the March 2023 Budget, the Lifetime Allowance for pensions – commonly referred to as the “£1m limit”, or LTA for short – has from 6^th April 2024 ceased to exist. Most pension savers are unlikely to be affected by the change in rules, with the tax treatment of their funds remaining broadly the same as they were before. However, for those who are affected, this is important stuff.

As with any new set of rules, the devil is in the detail, and so we’ve summarised some key planning points, and potential pitfalls, below.

“The king is dead, long live the king!”

Before being stricken from the statute books, the old standard lifetime allowance stood at £1,073,100. This has been replaced by two new allowances – we’ll start with the Lump Sum and Death Benefit Allowance, or LSDBA.

The LSDBA reflects the maximum which can be paid from a pension as a tax-free lump sum, both during a person’s lifetime and on death, and has been set at… £1,073,100. So, for someone who has not accessed their pension funds, the amount that can be paid as a tax-free lump sum death benefit will remain the same.

We’re pleased to confirm that anyone who previously benefitted from an enhanced lifetime allowance, for example by having registered for one of the ‘Fixed Protections’ when the LTA was periodically reduced by government in the past, will also benefit from an enhanced LSDBA of the same amount.

If you’ve already accessed part of your pension fund before 6^th April 2024, then your LSDBA will be reduced to take this into account.

“Should five percent appear too small, be thankful I don’t take it all” – Taxman (The Beatles)

It is reassuring to confirm that pension savers will still be able to access 25% of their fund as a tax-free lump sum, in the same way as before. These lump sum payments will be subject to another new allowance, the ‘Lump Sum Allowance’ or LSA.

The standard lump sum allowance will be £268,275 – i.e., equal to 25% of the LSDBA (and, of course… the old LTA). Anyone with a legacy LTA enhancement will also benefit from an increased Lump Sum Allowance equal to 25% of their old, enhanced allowance.

This means that the average pension saver will be able to access the same amount of tax-free cash from their fund as they could under the old rules.

There are, however, a few notable exceptions where the new rules might afford the opportunity for someone to access a higher tax-free lump sum.

“The young man knows the rules, but the old man knows the exceptions.” – Oliver Wendell Holmes, Sr. (US Supreme Court Justice)

These exceptions relate to the transitional rules which apply to people who have already accessed part of their pension funds under the old LTA rules, between 6^th April 2006 and 5^th April 2024. As we’ve noted, these transitional rules reduce someone’s lump sum allowance to account for the pension benefits that they have previously taken.

However, the transitional rules automatically assume that 25% tax-free cash was paid when these previous pensions were accessed. If this wasn’t the case, then individuals can apply for a special ‘Transitional Tax-Free Amount’ (TTFA) certificate, giving them a higher lump sum entitlement.

Situations where a TTFA certificate could result in a higher lump sum allowance include:

• Accessing a pension which had a guaranteed annuity rate, so you opted not to take any tax-free cash to secure a higher annual income.
• Starting to receive a final salary pension and choosing not to exchange annual income for tax-free cash (perhaps the conversion rates for this were unfavourable).
• Pension benefits were taken (including tax-free cash only) between 6^th April 2016 to 5^th April 2020, at which time the LTA was lower than £1,073,100.
• Where pension funds were previously subject to the “age 75” lifetime allowance test, which used part of the LTA with no lump sum benefits being paid out.

For example, Bob had a deferred final salary pension scheme, which came into payment from his 65^th birthday in May 2023. Bob opted to take a full annual pension of £40,000 p.a. and no tax-free lump sum, which used 74.55% of his standard lifetime allowance.

Under the standard calculation, Bob’s remaining lump sum allowance would be £68,275, this being 25% of the LTA he had remaining when the rules changed. Since Bob did not take any lump sum from his pension, he can apply for a TTFA certificate confirming this, entitling him to an unreduced lump sum allowance of £268,575.

“Never spend your money before you have earned it.” – Thomas Jefferson

Another situation where the TFFA certificate might bring an advantage is where someone had already used 100% of their LTA. These people are particularly let down by the transitional rules, because their LSDBA will be set to zero under the standard calculation.

This means someone who previously used 99% of their LTA might have an LSDBA of £807,507, but someone who had used 100% of their LTA would have an LSDBA of £0.

It may therefore make sense for anyone who has already used 100% of their lifetime allowance, and still has untouched (“uncrystallised”) pension funds remaining to apply for a TTFA certificate. Even if this won’t provide any further tax-free cash, it may provide additional allowances for the payment of death benefits as the lump sum.

“More people should learn to tell their dollars where to go instead of asking them where they went.” – Roger Babson

It is also worth highlighting a change to the pension funding rules, which was also introduced in the 2023 budget. We’ve mentioned different types of protection, which allowed individuals to preserve a higher LTA when this was about to be reduced. Most of these protections came with a stipulation that making any further pension contributions would result in loss of that protection.

This condition has now been removed. If the LTA protection was registered before the date of the relevant budget (15th March 2023) anyone with Fixed Protection 2016, 2014 or 2012, or Enhanced Protection, can now contribute to their pension without revoking their existing protection, allowing them to benefit from an enhanced LSA and LSDBA under the new rules.

We would therefore suggest that anyone who has opted out of funding their pension due to lifetime allowance protection should consider reviewing that decision.

“I am always looking for that nuance, that moment of truth…” – Paul Thomas Anderson

Although in the majority of cases the new rules will give similar outcomes into the old ones, there also a number of subtle differences, which are particularly relevant for those who have already accessed their pensions or taken advantage of lifetime allowance protection in the past. With the rule changes still fresh, what better time to undertake a spring clean and have your pension position reviewed?

We’re here to help.