Abolition of the lifetime allowance has already been widely publicised by the pensions industry, with implementation via lengthy and complex legislation supplemented by guidance and regulations (some of which is still to be published).
The abolition officially took effect on 6 April for the start of the 2024/2025 tax year, so as a reminder of the changes, this blog sets out a high-level overview of the new regime.
New Allowances
Three new allowances apply to the majority of benefit payments from 6 April 2024:
1. Lump Sum Allowance ("LSA")
Lump sums can be taken tax-free up to a maximum of £268,275 – the new LSA – unless an individual is entitled to a protected, higher allowance.
Benefit payments are tested against the LSA at a relevant benefit crystallisation event ("RBCE") – a new concept that replaces benefit crystallisation events under the old regime, and triggered when a member becomes entitled to a pension commencement lump sum, an uncrystallised funds pension lump sum, or a stand-alone lump sum (collectively, a "relevant lump sum").
Once the LSA (or Lump Sum and Death Benefit Allowance as explained below) is exhausted, any further benefit entitlement may be paid as a pension commencement excess lump sum ("PCELS"). This effectively replaces lifetime allowance excess lump sums, and HMRC have confirmed that any reference to this concept in schemes rules can instead be treated as references to PCELS, although it must be paid in connection with an individual becoming entitled to a relevant pension.
2. Lump Sum and Death Benefit Allowance ("LSDBA")
A new, tax-free allowance of £1,073,100 applies to an individual's pension entitlement for the duration of their lifetime as well as to any pension benefits distributed to their beneficiaries upon death, unless – like with LSA – there is a protected, higher allowance.
Schemes should be aware that relevant lump sums for LSDBA RBCEs are wider than those for LSA. These also include serious-ill health lump sums, as well as any lump sum death benefit other than a charity lump sum death benefit or a trivial commutation lump sum death benefit.
Once the LSDBA is exhausted, any further payments will be subject to the recipient's marginal rate of income tax.
3. Overseas Transfer Allowance ("OTA")
An allowance of £1,073,100 – equivalent to the LSDBA - applies to sums being transferred to a Qualifying Recognised Overseas Pension Schemes. Any transfer sums that exceed this allowance will be subject to an overseas transfer charge.
Schemes should note that the tax-free elements of trivial commutation, winding-up and small lump sums will not use up either of the LSA or LSDBA.
Transitional arrangements
Complex transitional rules apply where an individual has used some or all of their lifetime allowance prior to 6 April 2024. In particular:
- If an individual used 100% of their lifetime allowance before 6 April 2024, then their LSA and LSDBA will be zero;
- If an individual used some of their lifetime allowance before 6 April 2024, then their LSA is calculated by deducting 25% of the lifetime allowance they used prior to 6 April;
- If an individual used some of their lifetime allowance before 6 April 2024, then their LSDBA is calculated as follows:
- If an individual was entitled to take a serious-ill health lump sum before 6 April 2024 and was under the age of 75 when it was paid, then their LSDBA is calculated by deducting 100% of the lifetime allowance previously used;
- If an individual died under age 75 and a lump sum death benefit was paid before 6 April 2024, then their LSDBA is calculated by deducting 100% of the lifetime allowance previously used; and
- If neither of the above events occurred, the LSDBA is calculated by deducting 25% of the lifetime allowance used.
- If an individual has complete and accurate records of tax-free sums they've received previously, they can request that their scheme use this evidence instead of the above calculations. If satisfied that the evidence is complete, schemes must issue a transitional tax-free amount certificate which will replace the above methods of calculating LSA and LSDBA.
We will continue to provide updates as developments arise. In the meantime, if you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pensions team or your usual Brodies contact.
