Mark Devlin, Senior Technical Manager, Specialist Business Support, M&G Wealth, tackles the top 10 questions that the technical team have been asked about pensions following the announcements in the Autumn Budget.
Now that the LTA abolition is (mostly) sorted, and following the budget announcement on pensions falling into the IHT regime from April 2027. With that in mind, what have been the hottest subjects that the M&G Technical Team have been asked recently?
1. With the new requirement to notify pension schemes of the existence of the TTFAC, does this include public sector schemes?
Yes. Unlike the MPAA where you only need to notify non defined benefit schemes. Once the TTFAC has been issued all schemes you are a member of need to be notified.
2. How does a client that was issued with a TTFAC early in the tax year manage to notify all schemes within the 90 day period, now that this is in effect from the start of the tax year?
Short of time travel, this would be with great difficulty! At the time of writing, this has yet to be clarified.
3. How would a client be impacted when they took TFC with no protection from a DB scheme in 2017 when LTA was £1,000,000 and still has a million in DC uncrystallised.
If they had not taken any more than 25% of the total pot as PCLS then they would get higher LSA/LSDBA by applying for a TTFAC. Put the numbers into the calculator and you’ll see.
4. What changed with scheme specific tax free cash protection formulae?
The formulae had to be changed as it was broken, also towards the end of the last tax year HMRC detailed that this will work like it did under the LTA regime. Basically, the higher LTA protection that you had, the lower the tax free amount under the calculation.
There are still some issues that we await clarity on for those with LTA enhancements, and those with primary or enhanced protection and no lump sum right protections (Lump sum rights were below £375,000 as at 5/4/2006). But for all other cohorts, the formula works.
5. What allowances are required for scheme specific tax free cash?
A change that was introduced on the 18th of November means that a client doesn’t need to have any available LSA to pay these now. Previously they needed some allowance left. As long as the payment is below their available LSDBA it will all be free of tax, anything above the available LSDBA is taxed at their marginal rate.
6. I have a client with enhanced protection, is it safe for them to transfer to another scheme now?
It is indeed, the fixes to the legislation on the 18th of November now means that they can transfer and their LSA and LSDBA will now follow them, instead of being set to zero.
7. How will discretionary pension schemes be drawn into the IHT regime?
One to keep a watching brief on. As it stands unused pension funds will be deemed to be in the estate immediately prior to death. IHT may then be due on this and a proportion of any available nil rate band will be given to pension schemes to use. However, if the pension fund passes to a surviving spouse or civil partner it will be exempt from Inheritance Tax.
There is an ongoing consultation, on how this can be implemented. When we know more I’m sure we may have some presentations and articles about this.
8. Does the LSDBA fall away when IHT hits pensions from April 2027?
Going by the announcement no, all other tax issues with pensions are to remain unchanged. Therefore is somebody dies under age 75 any payments to beneficiaries after IHT is deducted will be free of income tax up to the available LSDBA and taxable at the beneficiaries marginal rate thereafter. For death after 75, IHT will be deducted and the remainder will be subject to marginal rate taxation.
9. Will the use of trusts become more popular for pension death benefits?
Using a bypass trust will not avoid the IHT charge on unused pension funds. However, one of the fundamental reasons for using a bypass trust is to provide a degree of control over the ultimate destination of unused pension funds (as the trustees of the member’s trust will control the destination of what was the pension fund money). This level of control is not offered by pensions freedoms, where the member’s dependant or nominee will then nominate a successor via their own expression of wish form.
A bypass will therefore still be an important consideration for those with a desire for control over who benefits and when if they are likely to have unused pension funds on death.
It may be more beneficial to have the IHT hit once (although periodic and exit charges may apply) and then it’s broadly speaking the growth of the trust that will be taxable. It’s important to remember that this is still at consultation phase as to how this can be implemented, so we can’t be sure on what planning may be best at the present time.
10. Is taking benefits from a DB scheme a RBCE?
If taken purely as a scheme pension it isn’t. If you take any PCLS that is a RBCE.
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