On 6 April 2024, the Lifetime Allowance (LTA) was abolished. In the years prior to the abolition, various types of transitional protection were made available. These protections provided either an enhanced LTA and/or greater tax-free lump sum rights.

When the LTA was replaced by the Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA), the new rules looked to preserve the augmented benefits these protections provided.

Depending on the type of protection held, the new rules now enhance an individual’s LSA & LSDBA as follows:

Scheme Specific Lump Sum Protection

Another form of protection is scheme specific lump sum (SSLS) protection. This was automatically granted when, before 6 April 2006, there was a right to be paid a tax-free lump sum of more than 25% of a pension fund.

As per its name, SSLS is specific to the pension scheme in question. It is therefore lost on transfer (unless the transfer is a block transfer) and to retain the higher lump sum, the individual must become entitled to all benefits under the scheme at the same time.

SSLS calculation

Under the LTA system, the SSLS would be revalued to account for growth in the fund, as well as changes in the LTA. Once the LTA was abolished, the new rules looked to provide the same outcome.

Initially, the new SSLS calculation didn’t work as intended and, in some cases, provided higher tax-free lump sums. The legislation has since been retrospectively corrected and now follows the previous approach. As revised, the SSLS calculation can be summarised as follows:

(5 April 2006 lump sum rights x 1.2) + 25% of (present day fund - (5 April 2006 fund x LSDBA/£1.5M))

In certain cases, 100% of the pension fund could be taken tax free, known as a ‘stand-alone lump sum’. For these cases, the maximum stand-alone lump sum that can now be paid is the tax-free amount that was available on 5 April 2023.

SSLS impact on LSA and LSDBA

To receive a SSLS, the member is required to have sufficient LSDBA remaining to cover the lump sum paid. There is not a requirement to have any LSA when taking a SSLS.

Although LSA is not needed for a SSLS, 25% of the fund accessed will still count towards the individuals LSA (even though the tax-free amount paid will be higher).

This can mean that the order in which a SSLS is taken can sometimes result in significantly more tax-free cash becoming available.

Case study – Mo

Mo has pension rights of £1.5m, of which £500,000 is held in a scheme where he has SSLS protection. His protected tax-free lump sum rights are £300,000.

He has no other protections, so the standard LSA of £268,275 and LSDBA of £1,073,100 apply.

Option 1 – Take SSLS first

If Mo takes his protected lump sum of £300,000 first, this will have the following impact on his allowances:

• LSA = Uses £125,000 (25% of £500,000), leaving £143,275 remaining.
• LSDBA = Uses £300,000 (value of SSLS taken), leaving £773,100 remaining.

From his remaining uncrystallised pension fund of £1m, Mo can take a further £143,275 of tax-free cash (his remaining LSA).

Option 2 – Take unprotected rights first

Alternatively, if Mo crystallises his unprotected pension of £1m first, taking £250,000 (25%) as tax-free cash, this will have the following impact:

• LSA = Uses £250,000 (25% of £1m), leaving £18,275 remaining.
• LSDBA = Uses £250,000 (25% of £1m), leaving £823,100 remaining.

Since SSLS protection does not require Mo to have any LSA, his remaining LSDBA (£823,100) is more than sufficient to take all his protected lump sum of £300,000 tax free.

Taking the unprotected tax-free cash first and accessing the SSLS last means that Mo unlocks an additional £106,725 in tax-free cash.

Comment

Although becoming rarer, there are still quite a few individuals who have SSLS protection. Furthermore, there is a much higher number of people who hold other forms of transitional protection.

An understanding of how these protections interact with the LSA and LSDBA can sometimes uncover important tax planning considerations.

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.