Abolition of Lifetime Allowance

The Lifetime Allowance (LTA) was abolished on 6 April 2024 and replaced with the Lump Sum Allowance (LSA) and Lump Sum & Death Benefit Allowance (LSDBA). These new allowances are now the main tools that restrict what can be taken tax-free from a pension. 

The intention was that once the LTA was abolished, individuals would retain their existing tax-free lump sum rights. However, once the new legislation was introduced, a few errors were noticed, which needed correcting.

Amending regulations

Following a short consultation, further regulations to make the changes required to correct and clarify the outstanding issues were laid on 7 October 2024 and 9 October 2024.

‘The Pensions (Abolition of Lifetime Allowance Charge etc) (No. 2) Regulations 2024’ and ‘The Pensions (Abolition of Lifetime Allowance Charge etc) (No. 3) Regulations 2024’ subsequently took effect on 18 November 2024 and apply retrospectively from 6 April 2024 onwards.

Amongst other things, these regulations made some important corrections affecting individuals who are over age 75 or hold forms of lump sum protection.

Lump sum protection

The new regulations made some important amendments and clarifications for those holding enhanced, primary, individual, and fixed protections.

Most importantly, it corrected the formulae for calculating the tax-free lump sum entitlements for enhanced, primary and scheme-specific lump sum protection. Many individuals holding these forms of protection had found themselves unable to access their pension benefits whilst they awaited this legislation, since doing so could have resulted in the loss of some or all of their protected lump sum rights.

Age 75 disregard

Under the lifetime allowance regime, pension funds automatically crystallised at age 75 under BCE5, 5A or 5B, even though no tax-free cash would be taken.

From 6 April 2024, the standard transitional calculation incorrectly assumed that 25% of the amount crystallised at age 75 had been taken as tax-free cash. This resulted in a corresponding reduction to the LSA & LSDBA of affected individuals, restricting their available tax-free entitlement.

Although these individuals could obtain a Transitional Tax-Free Amount Certificate (TTFAC) to correct the position, this would not always fully restore their previous tax-free cash entitlement. In addition, if they had already taken further tax-free cash after 6 April 2024, it would no longer be possible for affected individuals to obtain a TTFAC.

The new regulations now disregard any BCE5, 5A or 5B where an individual did not subsequently take a lump sum from their pension before 6 April 2024. This means that the standard transitional calculation will no longer reduce the LSA & LSDBA in respect of these age 75 events.

Where an individual did take a lump sum between age 75 and 6 April 2024, the age 75 disregard will not apply. This is because lump sums taken after age 75 were not BCEs and therefore would have been more complicated to account for. Individuals in this position will still need to consider applying for a TTFAC if they believe their LSA & LSDBA are excessively reduced due to BCE5, 5A or 5B.

Interestingly, a lump sum taken for the purpose of the age 75 disregard is any lump sum listed under S166(1), FA04. This does not just cover tax free cash and includes a ‘refund of excess contributions lump sum’.

Comment

The regulations introduced on 18 November have corrected the position for many people who previously saw their tax-free cash entitlement disproportionally reduced by the new rules.

Those benefitting from the age 75 disregard may still see a reduced LSA/LSDBA in annual statements. This is because schemes won’t check to see if the age 75 disregard applies until they ask to take further tax-free benefits.

Further guidance on how the age 75 disregard should be administered was published on 5 December in HMRC newsletter 165.

Important information

Please note this is for general information only and is based on LV's understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.