Shaun Tucker is the Pensions Technical Specialist providing our internal teams, our adviser partners and their clients with the support they need to achieve the best possible pension outcomes. He's a key part of the team at Parmenion working to implement the LTA changes on our pension platform and make the transition brilliantly straightforward.
Over the next few weeks, he and the rest of the team will be here to explain what is happening and what we're doing to support you ... What's changing?
From 6th April 2024, there will be new pension rules and two new allowances will replace the Lifetime Allowance (LTA). So, we have some new names and acronyms to get used to: the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance.
What's the Lump Sum Allowance?
This will operate to limit how much tax-free cash an individual can receive. The Lump Sum Allowance, or LSA, will be set at £268,275 (25% of the current LTA). Pension commencement lump sums and the tax-free element of any Uncrystallised Funds Pension Lump Sums (UFPLS) will reduce an individual’s LSA. The taxable bit of someone’s pension, such as the amount designated to drawdown or the taxable part of a UFPLS, will not be tested against the LSA, but withdrawals will continue to be taxed at the individual’s marginal rate of income tax.
What's the Lump Sum Death Benefit Allowance (LSDBA)?
This will operate as a cap on how much can be paid as tax-free lump sums on death. The Lump Sum and Death Benefit Allowance, or LSDBA, will be set at the same limit as the current LTA, which is £1,073,100. The LSDBA will test all tax-free lump sums that an individual has received during their lifetime plus any tax-free lump sum death benefits that are paid out from their funds once they die.
The test is only concerned with limiting tax-free lump sums that are paid on death, which means that any amounts designated to beneficiary’s drawdown (whether that’s dependant or nominee’s flexi-access drawdown), regardless of whether the individual died before or after 75, will not reduce this allowance. Lump sum death benefits paid before April 2024 will not be tested against new LSDBA.
So that sounds fairly simple...
Maybe now’s a good time to mention the third new allowance!
Entirely independent to the other two, this one’s called the Overseas Transfer Allowance (OTA). This limits to £1,073,100 the amount that can be transferred to a Qualified Recognised Overseas Pension Scheme (QROPS) without incurring a tax charge. This allowance will only affect a small proportion of clients, and only really affect people moving away from the UK and transferring their UK pensions savings aboard. The overseas transfer charge on QROPS transfers that don’t meet very strict conditions should deter any abuse of the allowance.
Traditional Tax Free Cash Certificates
An important part of these changes is the introduction of tax free cash certificates. It’s likely this will be complex for certain clients, particularly anyone who’s taken DB benefits but not all of the tax free cash they might have been entitled to. There are timing deadlines early in the new tax year that we all need to be aware of for clients who are crystallising, especially any taking monthly PCLS or UFPLS.
Look out for an article on this before the end of the tax year.
What are the other considerations for advisers?
There are 3 other topics for your agenda before the UK tax year ends on 5th April 2024:
- Consider crystallising any available benefits in excess of the LTA now, while there’s no LTA charge.
- From April onwards, anyone with both large DB and large DC pots may want to consider commuting less of their DB pension, for a higher guaranteed income, and to increase the tax-free lump sum they can take from their DC pension. The additional DB scheme pension income could fund contributions to the DC pension and attract tax relief up to the relevant limit of relevant UK earnings and/or allow the DC pot to remain uncrystallised for longer. These options could help build up a larger DC pot, and so for more of the LSA to be utilised when the DC pot is eventually crystallised.
- Make sure Expression of Wish forms are up to date and completed in a way that gives potential beneficiaries maximum flexibility. Death benefits that are designated to beneficiary’s drawdown from April 2024 will not be tested against the LSDBA and are entirely tax-free where the member dies under the age of 75. EOW forms should ensure that any potential beneficiaries who are not dependants, such as adult children or grandchildren, have the option of nominee’s drawdown and are not restricted to taking lump sums. It’s absolutely worthwhile checking this because these new rules are even more generous to legacy planning and for cascading pension wealth tax-efficiently to the next generation.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.