OverviewIn the Spring Budget 2023, the Government announced a plan to remove the current lifetime allowance (LTA) framework and to replace this with new legislation from 6 April 2024. This new legislation, which is expected to receive Royal Assent around Easter 2024, includes two new allowances:
- The lump sum allowance (LSA) set at £268,275
- The lump sum and death benefits allowance (LSADBA) set at £1,073,100.
Higher allowances will apply where clients hold existing LTA protection or enhancements (more details on this can be found in our Replacement of the lifetime allowance factsheet).
Where clients have accessed (crystallised) pension savings prior to 6 April 2024 and have therefore used part or all of their lifetime allowance, the LSA and LSADBA will be reduced by a “default” calculation (shown below). However, individuals have the option to apply for a “transitional tax-free amount certificate” (TTFAC) where this would 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 will 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 will not be affected by this as they will not benefit from applying for a TTFAC. However, 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 has no LTA remaining as of 5 April 2024 – the default position is the client will have no LSA or LSADBA.
- Where the client has 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 (this is covered in the factsheet mentioned above).
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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 would be £312,500 and the LSADBA would be £1,250,000. However, the “default” reduction would be: (£1.25m x 50%) x 25% = £156,250 This means the default allowances remaining would be £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 would 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 would be: (£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 £1.0m, 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. |
Applying for a certificate and action required
Certificates cannot be applied for before 6 April 2024. If you have identified a client that requires a TTFAC, it is important to ensure that a RBCE does not occur in the new tax year before the certificate is approved and received.
How do I request a certificate from Fidelity?
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