Benefits tested before April 6 2024
From April 6 2024, only lump sum payments are tested against the limits and for those taking benefits for the first time, the rules are relatively straightforward.
However, many clients will have already taken benefits prior to April 6 2024 and these need to be taken into account.
To achieve this, the client’s previously used LTA percentage will be converted into a reduction in both the LSA and the LSDBA.
Where the client has previously used 100 per cent or more of their LTA, under the standard calculation method there will be no entitlement to either LSA or LSDBA.
Where the LTA used is less than 100 per cent, both the LSA and LSDBA will be reduced by 25 per cent of the total LTA previously used.
As well as the standard method of valuation shown above, clients can also apply for a transitional tax-free cash certificate.
This option will primarily be for those who have taken their defined benefit pensions without the maximum tax-free cash entitlement, because of either restrictions in the scheme rules or unattractive commutation factors.
Example 1
Gurdeep has previously used 55 per cent of his lifetime allowance.
In monetary terms this is £590,205 (£1,073,100 x 55 per cent). Both his LSA and LSDBA will be reduced 25 per cent of this value, ie £147,551.
Therefore, his LSA will reduce to £120,724 (£268,275 - £147,551) and their LSDBA will reduce to £925,549 (£1,073,100 - £147,551).
Example 2
Brian took his DB pension of £28,000 a year in June 2017, when the LTA was £1mn. He did not take any tax-free cash as the commutation factors were unattractive.
Brian will have used up 56 per cent of the LTA, ie £28,000 x 20/£1mn.
Under the standard rules, Brian would now be restricted to tax-free cash of 25 per cent of 56 per cent of the LTA.
However under the new rules, as he did not take any tax-free cash, he can request a transitional tax-free cash certificate.
The change will allow him to take up to the full £268,275, providing he still had other uncrystallised funds worth £1,073,100 or more.
Protected LTAs
Individuals that have exceeded or likely to exceed the LTA have previously been able to apply for various forms of LTA protection.
Those with protected LTAs will maintain their higher tax-free cash entitlement as they will have a higher LSA. The higher protected LTA will also translate into a higher LSDBA.
Example
A client with Fixed Protection 2014 will have a LSA of £375,000 and an LSDBA of £1.5 million.
A client with individual protection 2016 and a protected value of £1.2mn will have a LSA or £300,000 and a LSDBA of £1.2mn.
Where those with LTA protection have already crystallised some of their benefits prior to April 6 2024, their LSA and LSDBA will be reduced in the same way as those with the standard allowances as described above.
