Pension Tax-Free Cash – New Rules You Shouldn’t Miss
The Lifetime Allowance is no more, but its legacy lives on in some new rules about how much tax-free cash you can take when you crystallise your pensions at retirement. No surprises – the rules are complex and introduce a host of new impenetrable acronyms. Let me try to walk you through it.
There’s a new Lump Sum Allowance for tax-free cash from pensions – that’s our first acronym – the LSA. That allowance caps tax-free cash at £268,275 – that’s 25% of the old Lifetime Allowance before it was abolished. If you have transitional protections against the old lifetime allowance, then your personal LSA could be higher.
This is important – if you would normally be entitled to tax-free cash from a scheme, but you don’t have enough LSA available, then you can still be paid a lump sum, but it won’t all be tax-free. Anything over the LSA will be taxable – this is called the Pension Commencement Excess Lump Sum, or PCELS. As well as the Lump Sum Allowance, there’s a new Lump Sum and Death Benefit Allowance, or LSDBA which include serious ill-health and some lump sum death benefits paid on death before age 75.
Example: Benefits taken before 6th April 2024 – Standard Calculation
If you have taken some benefits before 6th April 2024, there are two calculations you’ll need to consider. The standard calculation will deduct 25% of the lifetime allowance you have used in the past, from the new Lump Sum Allowance.
Tina crystallised £500,000 of her SIPP in 2015/16 – back then the LTA was £1.25m. In order to work out how much LSA she has left, we need to deduct 25% of the LAT she has already used from the LSA.
Her £500,000 crystallisation used 40% of the then LTA. So the sum is:
0.25 x 0.4 x £1,073,100 = £107,310
Take the £107,310 off the LSA of £268,275 and you get a remaining LSA of £160,965 available to Tina.
Example: Benefits taken before 6th April 2024 – Alternative Calculation
But you might benefit from using an alternative calculation – doing so might mean you get a higher remaining LSA.
IF you can evidence the exact amounts of tax-free cash you have received in the past, you can apply for a Transitional Tax-Free Amount Certificate, or TTAFC which will confirm the amount (if anything) that should be deducted from your LSA.
John used 80% of the LTA in 2021/22 by taking benefits from his DB scheme – he took no cash as the commutation rates weren’t favourable. He also has a SIPP with £500,000 in it.
Under the standard calculation, John’s remaining LSA is:
£268,275 – (0.25 x 0.8 x £1,073,100) = £53,655
But if John successfully applies for a TTAFC, then as he took no cash from the DB scheme, he has the full LSA available to him.
His SIPP is £500,000 so he can take the tax-free cash of 25% of that – £125,000.
That would mean he still has an unused LSA of £268,275 – £125,000 = £143,275
If you’re going to apply for a TTAFC, then you MUST do this before your first Relevant Benefit Crystallisation Event after 6th April 2024
Resources
Video: Lifetime Allowance and Other Changes
Video: UK Pensions Have Changed – Now What?
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