What Does The Lifetime Allowance Abolition Mean For Me?

Under the new regime, a new allowance has been introduced which limits how much tax-free cash can be taken. The Lump Sum Allowance (LSA) caps tax-free cash at £268,275 for those without ‘protection’ but certain individuals may actually be able to get more tax-free cash.

As a reminder, before 6th April 2024 tax-free cash was typically limited to 25% of the amount withdrawn, subject to having enough Lifetime Allowance available. Now, there is no longer a need for the latter test.

The standard 25% calculation will usually produce the right result for most individuals, in which case there is no action required.

However, the new rules provide that if a client can evidence how much tax-free cash they’ve received in the past, they can apply for an alternative calculation and a ‘transitional tax-free amount’ (TTFA) certificate confirming the aggregate amount a client has used from their available Lump Sum Allowance. For some, this alternative calculation may increase their tax-free cash rather than under the standard calculation.

Who may be better off by getting a certificate under the new regime?

Those who before 6th April 2024:

  • Have taken less than 25% tax-free cash because their scheme had generous guaranteed annuity rates.
  • Only crystallised benefits when the lifetime allowance was below £1,073,100.
  • Took pension benefits that contained a disqualifying pension credit in respect of pension sharing.
  • Took benefits that contained GMP and that restricted the tax-free cash paid out to less than 25%
  • Are over age 75 and have ‘unused funds’ where they haven’t taken benefits.
  • Transferred benefits overseas but still had benefits in the UK that they will crystallise in the UK.   

You must apply for the certificate before the relevant benefit crystallisation event, and you can only apply once. It is extremely important to note that if you apply for a certificate and the remaining lump sum allowance is lower than the standard allowance, it cannot be cancelled. If this is likely to happen then clients shouldn’t apply for a certificate.

While the LTA no longer exists, there is still a cap on the amount of lump sum death benefits which can be paid tax-free on death before age 75 in the shape of the Lump Sum and Death Benefit Allowance (LSDBA). This is set at £1,073,100 for those without ‘protection’.

The LSDBA is a combined allowance for both lifetime tax-free lump sums and tax-free death benefits. So, the amount available for lump sum death benefits will be reduced by any tax-free cash amounts taken.

It’s even more important now to ensure you have nominated who will receive death benefits from your pension. Completing a nomination(expression of wish) both helps steer the scheme trustees as to who to pay on death but also ensures that all options under the scheme are available to beneficiaries.

This is a complex area and the rules around pensions and tax can change. Further uncertainty comes from the fact the Labour party has said its intention is to reverse this policy should it come into power however it seems difficult to see a way for that to easily happen.

If you think you or your beneficiaries could be affected by the LSA or LSDBA, you may want to contact the Team at Wealth Professional who will be delighted to help.