OverviewThe lifetime allowance (LTA) replacement regime, which came into force on 6 April 2024, introduced some new allowances. These include the following:
- The lump sum allowance (LSA) set at £268,275
- The lump sum and death benefits allowance (LSADBA) set at £1,073,100.
Higher allowances apply where clients hold existing LTA protection or enhancements.
Where clients accessed (crystallised) pension savings prior to 6 April 2024 and therefore used part or all of their lifetime allowance, the LSA and LSADBA are reduced by a “default” calculation (shown below). However, individuals have the option to apply for a “transitional tax-free amount certificate” (TTFAC) which could provide them with additional allowances. This is because the TTFAC will use the actual amounts of tax-free payments received, as opposed to the default calculation. Crucially, clients only have the option to apply for a TTFAC before the first Relevant Benefit Crystallisation Event (RBCE) occurs post-6 April 2024.
The majority of pension clients are not affected by this as they will not benefit from applying for a TTFAC. However, if you have not already done so, conducting an audit of all potentially-affected clients as soon as possible is highly recommended. As a starting point, it will only be clients that have, will, or could potentially have pension savings (from all sources) that would have exceeded their LTA, under current calculations, who could potentially benefit from a certificate (our Pension Summary report helps to identify clients who may be in this position).
What are the default calculations?
- Where a client had no LTA remaining as of 5 April 2024 – the default position is the client has no LSA or LSADBA.
- Where the client had LTA remaining as of 5 April 2024* – the starting LSA/LSADBA is set as the full allowance for the individual (standard or protected) less 25% of the lifetime allowance used prior to 6 April 2024.
* The calculations are different where there has been a payment of serious ill health lump sum or lump sum death benefits.
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Example 1 A client has Fixed Protection 16 (£1.25m) and used 50% of their LTA by taking a DB scheme pension with no PCLS in 2021. The starting LSA is £312,500 and the LSADBA is £1,250,000. However, the “default” reduction is: (£1.25m x 50%) x 25% = £156,250 This means the default allowances remaining amount to £156,250 for the LSA and £1,093,750 for the LSADBA. In this example, the client took no PCLS when their DB pension commenced. Therefore, by applying for a TTFAC, their allowances would not be reduced and will be restored to the original value. |
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Example 2 A client with no LTA protection used 50% of their LTA by taking £156,250 PCLS and designating £468,750 in 2015 when the LTA was set at £1.25m. The “default” reduction in this instance is: (£1.0731m x 50%) x 25% = £134,137.50 As this figure is less than the actual amount of PCLS received (£156,250), the client should not apply for a TTFAC. However, had the client crystallised 50% of their LTA in 2017 when the LTA was £1m, then they would have received £125,000 ((£1m x 50%) x 25%). This is less than the default reduction and so, in this case, they would benefit from a TTFAC. |
Clients over age 75
Where clients reached age 75 before 6 April 2024, the situation can be more complex. Much will depend on whether the client received tax-free lump sums after age 75 and before 6 April 2024. For more details on this please see TTFAC for clients over age 75 and taking PCLS – Is there still a trap?
Applying for a certificate and action required
If you have identified a client that requires a TTFAC, it is important to ensure that a RBCE does not occur before the certificate is approved and received.
How do I request a certificate from Fidelity?
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