In a series of articles in Professional Paraplanner this week, the M&G Wealth Technical Team answer a range of questions they have been receiving from the financial planning community on the upcoming abolition of the Lifetime Allowance.
Today the team answer questions on Fixed and Enhanced Protection and Scheme Specific Protected Tax Free Cash.
Fixed and Enhanced Protection
Can you tell me if it is just for the 2023/24 tax year that contributions won’t void protections? If a client contributes after 5th April 2024, does their lump sum allowance reduce to £268k?
If a client had applied for fixed or enhanced protection prior to 15 March 2023 the cessation reasons for these protections were removed from 6 April 2023. As long as they didn’t lose this protection between 15 March 2023 to 5 April 2023 then they can make contributions again. This will not reduce their lump sum allowance (LSA) (or lump sum death benefits allowance – LSDBA).
A lot of publications, including HMRC, mention 5th April 2023 as the date for testing uncrystallised benefits for Enhance Protection. Please would you clarify the situation.
This applies to how much LSA those with Enhanced Protection will have. It’s based on their uncrystallised funds as of that date. Those with tax free cash protection will have a LSA based on the value of their uncrystallised funds multiplied by the percentage on their certificate. Those without tax free cash protection will get a LSA of 25% of the value of their uncrystallised funds as of that date (capped at £375,000).
Their LSDBA will be based on their uncrystallised benefits value as of 5 April 2024, so there could be a case of making pension contributions this year to increase that.
Are we 100% satisfied that someone with an existing LTA protection (from pre March 23), who pays a contribution this tax year, will retain their protected LTA and that will carry across to new LSA and LSDBA allowances?
Yes! It was in the Finance Act last summer.
I have a client who has primary and enhanced protection and took almost all PCLS after April 2006 and now has largely crystallised benefits. He is terminally ill. What is the position on death and is there anything we should do pre April 24 and after?
His Enhanced Protection will take precedence. If he were to die pre April 2024 (and the benefits were settled this tax year) then there would be no LTA excess as there is no limit for Enhanced Protection under the LTA rules. If he dies (or the benefits are settled after) 5 April 2024, the new rules will take effect and his LSDBA will be the value of his uncrystallised funds as of 5 April 2024.
For his crystallised funds, as they were put into payment prior to the new regime, they will not be tested against the LSDBA. It will just be any uncrystallised funds or any pensions that are crystalised after 5 April 2024 that will be tested.
My client has enhanced and primary protection and a fund value of £3.5m. No benefits have been drawn. What action if any is required?
Making sure that the client is in a freedom-friendly scheme with up-to-date nomination appears to be the key action. The client may want to consider making a contribution this tax year to up their LSDBA for the enhanced protection. Aside from that it’s just the BAU advice issues.
Scheme Specific Protected Tax Free Cash
I’ve a question on the protected tax free cash being tested against the new lump sum allowance. Does this apply to pre 2024 crystallisations, or just future crystallisations?
Post April Scheme Specific Protected Tax Free Cash (SSPTFC) requires at least £1 of LSA to be payable, but other than that does not get tested against the LSA or LSDBA, it is just calculated and paid. 25% of the amount crystallised will be deducted from the LSA and the actual amount paid tax free from the LSDBA.
Any amount taken pre April 2024 will be taken into account in the standard transitional calculation based on LTA used, so 25% of the amount crystallised will be deducted from the LSA and LSDBA.
I have a client who currently has 100% tax free cash from an s32. Are there any implications I need to know about?
Their standalone lump sum was capped at the value they could get as at 5 April 2023, with the remainder being taxed at marginal rate. Aside from that all advice considerations remain the same. 25% of the amount crystallising is deducted from the LSA. The full tax free amount is deducted from the LSDBA. If they have Primary or Enhanced Protection then the full tax free amount is deducted from both.
We have a client who took protected tax free cash a few years ago. He has Fixed Protection 14 and a personal pension worth £1.3m. How does the protected tax free cash he took years ago affect his allowance now?
Any amount taken pre April 2024 will be taken into account in the standard transitional calculation based on LTA used i.e., it will create a deduction of 25% x LTA% used x £1.5m personal LTA used by it.
Does protected tax free cash on one scheme reduce the total tax free cash you can draw from your remaining pensions if you exceed maximum tax free cash limit?
Yes, 25% of the total amount crystallised will be deducted from LSA. It may be beneficial to take SSPTFC last as it does not get tested against allowances. The actual tax free amount paid is deducted from the LSDBA.
A provider is telling me a client who had scheme specific PCLS at A-Day equating to 100% will now have less than 100% following the new rules – circa 80% now. Does this sound right?
That sounds like a Standalone Lump Sum. So, it depends on fund growth. The tax free amount is based on the value at 5th April 2023.
