INVESTMENTS & PENSIONS
BENEFICIARY ANNUITIES AND BENEFICIARY FLEXI-ACCESS DRAWDOWN
Where a pension scheme member dies under age 75 and a beneficiary ’ s annuity or beneficiary flexiaccess drawdown is set up , income payments will be made free of income tax . Where death occurs on or after age 75 , income will be subject to the beneficiary ’ s marginal rate of tax .
SCHEME-SPECIFIC TAX-FREE CASH
Those who were entitled to more than 25 % taxfree cash from a particular scheme at A-day were able to retain that protection under the ‘ scheme specific tax-free cash rules .’ Certain conditions have to be met , such as that all benefits must be crystallised in one go and that any transfer must meet the conditions to be a ‘ block transfer .’ The amount of tax-free cash available is protected in accordance with a particularly complex formula .
There are two components to the calculation . Under the first , the monetary amount is indexed by £ 1.8m / £ 1.5m , which means it is uplifted by 20 %. The second part considers the increase in fund value resulting from post A-day contributions and growth . This approach - which seems quite sensible on paper - takes the current fund value and deducts from this the A-day fund value adjusted for any change in the lifetime allowance . A quarter of this amount is added to the tax-free cash entitlement . Unfortunately , as the lifetime allowance was mainly reducing since 2012 , rather than gradually increasing as expected , the A-day fund value is adjusted downwards instead of upwards before being deducted from the current fund value , which artificially inflates the tax-free cash entitlement . What ’ s more , those with a protected lifetime allowance under any of the fixed or individual protections get less tax-free cash under this calculation than if they hadn ’ t applied for protection .
The formula to calculate scheme-specific tax-free cash was previously as follows :
A-day lump sum x £ 1.8m / £ 1.5m + 25 % x ( Total pot – A-day pot x CSLA / £ 1.5m )
CSLA is the current standard lifetime allowance , which is swapped with the higher protection lifetime allowance if any of the fixed or individual protections have been applied for .
From 6 April 2024 , this formula was simplified to :
A-day lump sum x 1.2 + 25 % x ( Total pot – A-day pot x 0.7154 )
As can be seen the new formula is essentially the same as the old one - 1.2 is the same as £ 1.8m / £ 1.5m and 0.7154 is the same as £ 1.0731m / £ 1.5m – but the use of fixed values does mean that the calculation of tax-free cash is the same for everyone , as opposed to being slightly different for those with a protected lifetime allowance .
This approach retained the current treatment whilst eliminating the anomalous outcome for those holding Protection .
At the time of writing , there was an error in the new formula for calculating the protected lump sum . Members wishing to take their lump sum should contact the scheme and ask whether this is currently possible , or whether they have to wait until the legislation is amended .
LIFETIME ALLOWANCE PROTECTION
Some of the most complicated aspects of the new regime concern the many different forms of lifetime allowance protection and how these impact on the LSA ( and therefore tax-free cash ) and the LSDBA . The general principle is that the tax-free cash and lifetime allowance entitlement under the protection applied for will be honoured by way of an increased LSA and LSDBA . For more details see HM Revenue & Customs Pensions Tax Manual .
OVERSEAS TRANSFERS
A new ‘ overseas transfer allowance ’ ( OTA ), also set at £ 1,073,100 , was introduced to deal with transfers to QROPS . Where the cumulative value of transfers to QROPS schemes exceeds the allowance , the 25 % overseas transfer charge applies .
FINAL THOUGHTS
The new regime is particularly complex , but as with any new legislation advisers should consider the actual impact on their clients . Those with benefits in excess of the lifetime limits now have more freedom from specific pension tax charges . And those whose benefits are never likely to breach the allowances will probably not notice significant change .
MAY 2024 | 25