The key point to note here is that the limits for the tax-free pension commencement lump sum (PCLS) have not changed, and the PCLS is still limited to 25 per cent of remaining available LTA (whether that is the standard LTA or a protected LTA).
If a client exceeds the LTA, they will not be able to take a PCLS from the excess. That is the same as last year. The difference this year is that they will not pay an LTA charge on the excess.
They will still have the option of taking the excess as an LTA excess lump sum if they want to. If they do, it will be subject to their marginal rate of income tax.
If they do not take an LTA excess lump sum, it means more money for their income drawdown, lifetime annuity or scheme pension depending on the type of scheme.
Unless the client has a specific need for the funds, it may be worth considering the pension option over the excess lump sum option as it means the income tax will be spread out over the years rather than being paid in one go like it would with a lump sum.
If you have clients who happened to take benefits in the lead up to the spring Budget, and they incurred an LTA charge, they might ask if it can be reversed.
Unfortunately, this might not be possible as there’s no obvious mechanism in the rules to do so (outside of 30-day cancellation rights), so it may come down to scheme administrator discretion.
Age 75 test
For the vast majority of clients, their 75th birthday is the final checkout point for LTA usage. There are three potential tests here depending on the type of scheme and whether the client has already taken benefits:
- BCE 5 – uncrystallised funds in a defined benefit scheme.
- BCE 5A – growth on funds in income drawdown since initial designation.
- BCE 5B – uncrystallised funds in a defined contribution scheme.
A client might wonder why their provider is still doing the calculation, given no LTA charge can arise. Again, it comes back to PCLS calculations.
The LTA used under BCE 5A (drawdown) is taken into consideration when working out how much LTA (and therefore PCLS) a client has left. The LTA used under BCE 5 and BCE 5B, however, is ignored for this purpose.
There is still a legislative requirement to perform all LTA tests and report the LTA usage to clients, but HMRC has intimated that providers can take a pragmatic view as to whether they do an LTA test where that test has no meaningful bearing on anything.
With a consumer duty hat on, some providers might opt not to do BCE 5 and BCE 5B, given they would be reporting LTA usage that has no relevance to the client.
