How do lifetime allowance (LTA) protections work under the new pensions regime? Martin Jones, Technical Manager at AJ Bell, looks at the seven LTA protections and what paraplanners need to know when addressing them within a financial plan.
6 April 2024 saw the introduction of a new regime for pension benefits. Out went the lifetime allowance (LTA), and in its place came the three-headed monster of the lump sum allowance (LSA), the lump sum and death benefits allowance (LSDBA) and the overseas transfer allowance (OTA).
The LTA had been in place since 2006, and it put a limit on how much clients could take from their pensions without incurring additional tax charges. Each time a client took a lump sum or set up a type of pension income, it used up some of their available LTA. If they exceeded it, there was a tax charge of 55 per cent for lump sums and 25 per cent for pension income.
It was initially set at £1,500,000, and it rose incrementally to £1,800,000 in 2010/11. However, it was then reduced several times, starting in 2012/13, and at each reduction the government introduced a form of transitional protection. These sat alongside the two forms of protection introduced in 2006.
This left us with seven protections in total, all giving clients a higher lump sum and higher LTA than normal.
Meet the new boss…
The new allowance you’re mostly likely to interact with is the LSA. Tax-free lump sums and the 25 per cent tax-free element of an uncrystallised funds pension lump sum (UFPLS) count against this. It’s currently set at £268,275.
Next is the LSDBA. Lump sum death benefits count against this, but so do tax-free lump sums and the 25 per cent tax-free part of UFPLSs taken during the client’s lifetime. (Note that lump sum death benefits paid from drawdown funds that were already in existence on 6 April 2024 aren’t counted against it.) This is currently set £1,073,100. You’ll recognise that number as being the same as the standard LTA in 2023/24.
Transfers from UK schemes to Qualifying Recognised Overseas Pension Schemes (QROPS) are counted against the OTA. This is also set at £1,073,100. For brevity, we’ll put this to one side.
…Same as the old boss?
Yes and no.
The good news is that these protections all remain in force under the new regime.
Furthermore, clients holding enhanced protection and any form of fixed protection can now make contributions to their pensions. Before 6 April 2023, this would’ve caused them to lose their protection.
Let’s look at how protections affect pension benefit under the new regime.
Under the old regime, the transitional protection provided for a higher tax-free lump sum and a higher LTA. (In the case of enhanced protection, the LTA was effectively unlimited.) Under the new regime, the protection just provides a higher lump sum limit.
Taking the later protections first, all forms of fixed protection and individual protection thankfully provide the same lump sum limits as they did before.
For the fixed protections, the LSDBA is the same as the protected LTA. The LSA is 25 per cent of that. So, for example, fixed protection 2016 provides an LSA of £312,500 and an LSDBA of £1,250,000.
And again for the individual protections, the LSDBA is the same as the protected amount, with the LSA being 25 per cent of that. The protected amounts depended on the value of the client’s funds at 5 April 2024 (for IP14) and 5 April 2016 (for IP16).
It gets a bit more complicated with enhanced protection and primary protection.
Clients holding enhanced protection will have an LSA of £375,000 (i.e. 25 per cent of the 2006/07 LTA of £1,500,000). This is the same as under the old regime.
For clients with a protected lump sum, however, their lump sum limit for each scheme is the same amount as what their maximum lump sum would’ve been on 5 April 2023. In practice, this means taking the percentage from the protection certificate and multiplying it against the value of the client’s uncrystallised funds in that scheme on that date.
There is also a wrinkle with their LSDBA. Rather than being set at £1,500,000, which you might expect, it’s the value of the client’s uncrystallised rights at 5 April 2024. Again, this is scheme-based.
With primary protection, the LSA is £375,000, which is the same as under the old regime.
It’s possible to have a protected lump sum under primary protection, and this was recorded on the certificate as a monetary amount. In these cases, you multiply the monetary amount by 1.2.
Unlike with enhanced protection, the LSDBA is consistent with the old rules, and the calculation is £1,800,000 x (£1,800,00 x PP factor).
Main image; tim-johnson-OHOI3nMYOKo-unsplash
