On the second day of a series of articles on the imminent abolition of the Lifetime Allowance (LTA) for Professional Paraplanner, the M&G Wealth Technical team answer questions they have been receiving from the financial planning community on Transfer to a QROPS and Transitional Tax Free Amount Certificates.
Read session 1 HERE>
Transfer to a QROPS
What is the Overseas Transfer Allowance under the new regime?
The starting Overseas Transfer Allowance will be equal to the members lump sum death benefits allowance – LSDBA (not the available LSDBA) so for people with no protection this will be £1,073,100.
If you have remaining uncrystallised funds and have used 100% of the LTA, could you transfer to a QROPS up to the £1,073,100 and then take further tax free cash?
That was the position but HMRC have recently stated there will be regulations laid to limit the amount of OTA a person will have based on previous benefits taken, details of which we await.
The lump sum allowances for the QROPS and the UK do not interact.
The Overseas Transfer Allowance as drafted is a standalone allowance and will not interact with the LSA or LSDBA.
Transitional Tax Free Amount Certificates
An individual has used up all of their LTA pre 5 April 24 with a DB scheme but didn’t receive max tax free cash (TFC). They also have a crystallised drawdown pot. Can they apply for a Transitional Tax Free Amount Certificate (TTFAC), so they can be certain of extra TFC before restarting PPP contributions?
You can only apply for a TTFAC from a scheme you are a member of but we expect it will be with the scheme you will have your first Relevant Benefit Crystallisation Event (RBCE) with in the new regime. If you are planning to ask a scheme you are a member of then you should be able to get one in advance of any contributions. There should be no uncertainty if there is complete evidence.
In 2017 a client used 80% of her LTA which is £1.5m which was from a DB scheme but took no PCLS. She has an uncrystallised DC pension of £850,000. How much PCLS can she take?
If she just uses the default LSA used it will be £75,000 (basically 20% of her starting £375,000 LSA). If she gets a TTFAC her LSA will be £375,000. So she should be able to take 25% of the DC pot (£170,000) as PCLS and have LSA left.
Who do you request a TTFAC from? Is it the scheme /provider the client will now take the benefits from or the scheme who didn’t pay out the TFC originally?
You request it from any scheme you are a member of which may or may not be the scheme you didn’t take tax free amount from.
Can a certificate be applied for now?
You will not be able to confirm LTA used pre 6th April 2024 until after 5th April 2024, so we don’t; think so. Additionally, they don’t exist yet as we are still at Bill stage and this is not law.
A client who has Fixed Protection 2016 and crystallised 100% to take tax free cash in the 2023/24 tax year. The remaining amount is in drawdown and in a freedom friendly scheme. What is the benefit in applying for the transitional protection certificate please?
If benefits will fully be passed on as beneficiaries income there is none. If there will be a lump sum paid pre 75 (perhaps because the nomination was not correct) then lumps sums would use LSDBA. Without a TTFAC this would be £0, with one it would be £1.25m less the tax free cash amount paid.
I have a client that is just over the LTA and a DB pension that she has not drawn down on. This is due to be paid on the 10 April 2024 at normal retiring age of 65. She intends to take no tax free lump sum. She has around £700K in an uncrystallised SIPP. I presume that she can have 25% of the SIPP post 6/4/24.
Yes, as she will have taken no benefits under the LTA regime (presumably) it will all be on the new rules. DB scheme income does not use up these new allowances, so she will have a full LSA of £268,275.
We have clients who have DB pensions in payment which will have in many cases used up the whole of the LTA. If they also have DC benefits, does it make sense to get a TTFAC to get their LSDBA back on death prior to 75?
Yes, or their personal representatives can apply for this. The key is to get this applied for before any relevant BCE, as a lump sum death benefit would be a relevant BCE.
I have used 24% LTA but received no TFC. Who do I ask for a TTFAC? My DB pension in payment provider or my SIPP (uncrystallised) provider?
You can only apply for a TTFAC from a scheme you are a member of but we expect it will be with the scheme you will have your first Relevant Benefit Crystallisation Event (RBCE) with in the new regime.
If the Scheme Provider issue the TTFAC, but the client has another uncrystallised plan, can the Certificate be applied against either?
Yes, the certificate will give the info on what LSA the member has for ongoing use with all schemes.
How can the client get evidence if the scheme refuses?
If they cannot supply full evidence then they will not be able to get a TTFAC.
Could providers automatically generate certificates for those already in phased drawdown without the need for application?
The rules state that the member or their personal representatives have to apply, so as it stands No.
I’ve a client who has utilised almost exactly 60% of his FP2016 LTA in drawing scheme pensions from two DB schemes (no PCLS paid). He has £1.3 million in an uncrystallised SIPP. It appears we can apply for a £312,500 LSA. Is this correct?
They will have an LSA of £312,500. You apply to get a TTFAC showing a £0 deduction instead of a 60% x £1.25m x 25% deduction.
If a client has used up all of their TFC, i.e. taken £268,275 before 5th April 2024, presumably there is no scope for a TTFAC to take effect even if they took less than the maximum TFC from a scheme?
Not for getting tax free amounts during their lifetime. It would give them a higher LSDBA.
Do payments from small pots which did not use LTA count towards “TFC allowance” when applying for a TTFAC?
No, it’s the amount of PCLS, non-taxable amount of any UFPLS and any tax free cash from pre 2006 pensions.
If a client has IP16 and took a DB scheme in 2020 with full income and no TFC, is it possible for the client to take more TFC from their DC scheme? They have also taken a pension which has protected TFC, how will this impact the TFC entitlement to their DC scheme?
Unless there is scheme specific tax free cash for the member, they will be able to get the lower of 25% of the fund, the LSA or the LSDBA in the new world. They would need to apply for the TTFAC before they have a relevant BCE in the new regime. They will have LSA reductions based on the DB scheme but could request a TTFAC to allow higher LSA. It is 25% of the LTA used by the event when the SSPTFC was paid that is used in the default calculation not the actual amount of tax free cash paid.
