The new pension tax rules have been in place for more than six months now and the industry collectively breathed a sigh of relief when the chancellor chose not to tinker with them further in the recent Autumn Budget.
There are changes coming, however.
There were several serious errors in the Finance Act 2024 abolishing the lifetime allowance (LTA), which resulted in HMRC warning that some pension scheme members may need to wait before accessing or transferring their pension.
Regulations to correct these issues were finally laid in October, coming into force from November 18 2024 and backdated to April 6 2024.
In these regulations, HMRC has also taken the opportunity to fine tune some of the rules that, while working as originally intended, could be improved upon. This includes changes to the transitional rules impacting those who accessed a pension before April 6 2024.
Transitional rules up to November 18 2024
Transitional rules were introduced from April 6 2024 for individuals who had used up some, or all, of their LTA before that date. These rules calculate a reduction in the available amounts of their new lump sum allowance (LSA) and lump sum and death benefits allowance (LSDBA) based on the amount of LTA the individual had used up.
Members can choose whether they want a standard transitional calculation to determine their available allowances, or if they would like to instead rely on a transitional tax-free amount certificate.
The standard transitional calculation is intended to be suitable for most people. It reduces the LSA by 25 per cent of the LTA previously used.
This includes LTA deemed to be used in respect of pre-commencement pensions (pensions accessed before April 6 2006), and any used up at age 75 under the old benefit crystallisation events (BCEs) 5, 5A or 5B.
For example, if 60 per cent of the LTA has been used up by April 5 2024, the LSA will be reduced by 25 per cent of 60 per cent of £1,073,100. This reduces the LSA from £268,275 to £107,310.
There is also a calculation for reducing the available LSDBA. This is either:
- 100 per cent of all LTA used if any serious ill-health lump sums were paid before age 75;
- 100 per cent of all LTA used if a lump sum death benefit was paid in relation to members who died before age 75;
- otherwise, 25 per cent of the LTA used.
In contrast, a certificate calculates the reduction to both allowances by aggregating the actual amounts of tax-free cash taken at each BCE up to April 5 2024.
Where the member started taking pension benefits before the introduction of the LTA on April 6 2006, and went on to have a BCE before April 6 2024, a certificate will assume 25 per cent of the LTA reduction calculated at the first BCE was taken as a tax-free lump sum.
A certificate has therefore been a useful tool for those who took less than 25 per cent tax-free cash at their BCEs to ensure their allowances are calculated accurately and they do not miss out on tax-free cash they would have been entitled to under the previous regime.
Standard transitional calculation – age 75
From November 182024, the standard transitional calculation will now exclude LTA used up at the BCEs at age 75, as long as the member did not take any subsequent tax-free cash before April 6 2024.
