The information below may be subject to change as the Regulations bringing in these changes only received Royal Assent on 22 February 2024. HMRC has indicated that there will be changes on various areas. Unfortunately this means that there remains some uncertainty about certain aspects of the new regime.
From 6 April 2024 two new allowances will be introduced to control tax relief on lump sum payments from pension schemes. The two new allowances are:
- A ‘lump sum allowance’ – this is a cumulative limit of £268,275 on the tax-free part of lump sums paid at retirement. It will usually include the payment of pension commencement lump sums.
- A ‘lump sum and death benefits allowance’ – this is a cumulative limit of £1,073,100 on the total amount of the tax-free part of lump sums and lump sum death benefits payable to and in respect of a member. It will include pension commencement lump sums, tax-free elements of any uncrystallised pension lump sum and serious ill-health lump sum as well as the tax-free element of any authorised lump sum death benefits.
The new allowances set out above may have a higher value if someone has Lifetime Allowance (LTA) protection such as Fixed Protections or Individual Protections. It will be possible to apply for Fixed Protection (FP2016) and Individual Protection (IP2016) until April 2025. A check is made against the above allowances when pension benefits are paid.
Going forward from 6 April 2024 there is no limit on benefits paid as pension as pensions are subject to income tax.
Instead of valuing all pension savings (pensions and lump sums), the reporting is now whether the lump sums paid take the individual above either of the two allowances/limits. Any lump sums paid above the limit (Pension Commencement Excess Lump Sum) are taxed at the individual’s marginal rate. If the lump sums do not take the individual above this level, individuals do not pay tax on the lump sum. In addition, the limit applies on a cumulative per person basis so it will become necessary to ask what amounts of other lump sums or lump sum death benefits have been paid to that person.
Trivial commutation lump sums and small lump sums are excluded from the calculation. However, there does have to be available lump sum allowance for trivial commutation lump sums to be paid and there only needs to be some lump sum allowance; it doesn’t have to be sufficient to cover the trivial commutation payment.
How are benefits taken before 6 April 2024 tested against the new allowances?
There will be transitional arrangements to account for pension benefits taken before 6 April 2024. The standard calculations are:
The amount of lump sum allowance used is calculated by applying a factor of 25% to the percentage already used on 5 April 2024 e.g. 25% x previously used % LTA on 5 April 2024 x £1,073,100.
The amount of lump sum and death benefits allowance used is calculated by using the same formulae as above but adding on the amount of any serious ill-health sum paid before 6 April 2024.
If someone has used 100% of their LTA they have used everything up and cannot have a transitional calculation.
If someone has received a serious ill-health lump sum before 6 April 2024 and is under age 75 or a lump sum death benefit was paid before 6 April 2024 – 100% of the previously used amount should be deducted from their available lump sum and death benefit allowance. The previously used amount is not apportioned and the 25% rate does not apply.
If a member has taken less than 25% of their lifetime allowance used at 6 April 2024 as tax-free amounts they can apply to a transitional tax-free amount certificate that accurately reflects the amounts that they have taken.
Transitional tax-free amount certificate
HMRC has stated that most members should not need to apply for a transitional tax-free amount certificate as, if they have already taken 25% tax-free cash from their benefits, the standard calculation will be reasonably accurate. However, it may help a member where they chose to take less than the maximum tax-free cash of 25% of their pension benefits value.
For example, Susan flexibly retired from the LGPS (NI) and crystallised 24.4% of her original lifetime allowance limit. The amount of lump sum allowance she is calculated to have used by the standard calculation is 25% x 24.4% x £1,073,100 = £65,459. However, when Susan retired she did not take 25% of her benefits as tax-free lump sum electing instead to take £30,000. Susan could request a transitional tax-free amount certificate that takes into account the actual tax-free lump sum she actually took i.e. she would have used £30,000 from her lump sum allowance.
HMRC has stated that members may apply for a transitional tax-free amount certificate from any pension scheme of which they are a member. Anyone applying for a transitional tax-free certificate must do so before their first relevant RBCE (crystallisation of benefits) after 5 April 2024 and they cannot apply more than once. A member requesting a transitional tax-free amount certificate must provide NILGOSC with complete and accurate records of the previous tax-free lump sums that they have received. NILGOSC must be satisfied that the member has provided complete evidence and it will have three months to issue the certificate. These updated tax-free amounts then replace the 25% for the lump sum allowance calculation and replace the appropriate percentage or 25% for the lump sum and death benefit allowance calculation. The amounts on the statement are a monetary amount and not a percentage. The amount of lump sum allowance and lump sum and death benefit allowance used are to the nearest pound, rounded down.
It will take time for a member to gather the complete evidence and, if a member wishes to rely on this certificate before they crystallise pension benefits then pre-planning will be needed.