Continuing the 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 death benefits and pre-commencement pensions.
You can find Session 1 HERE and Session 2 HERE. Each leads into the content of the next session so are best read in order.
Death Benefits
If a client has already died and the beneficiaries haven’t claimed the benefits yet, will they be taxed in the new regime – or is this only if they are over the £1,073,100?
If it’s settled this year the LTA regime applies, if settled next year the new regime applies.
Will the tax free cash death benefits / lump sum cap be affected by clients in group life schemes that are set up like pensions if there’s a claim?
If it’s a pension lump sum death benefit this will use LSDBA.
A client is in income drawdown with £160k in pension savings. Am I correct in thinking: this is not included in the death benefit allowance post April? So if death occurs before age 75, will the lump sum be paid tax free? Will this amount be subject to IHT?
Yes, benefits crystallised under the LTA will not be tested against the new allowances. So there will be no effective limits on these, as long as there are paid within two years of the scheme becoming aware of the members death these will be tax free. Outwith the two year window, these will be taxable (as they are presently). Whether or not it is subject too IHT is down to the scheme rules and circumstances of the member.
Pre-commencement Pensions
Client has pre A day pensions with Shell – one is an off shore pension £12,800pa, one onshore £23,700 (pre A day values). Client has done a 2x small pots since A day. Does client still have only the 25x pre-A day rule for available TFC?
The client has had no benefits tested against the LTA. So if they have a relevant BCE under the new regime the UK pre-commencement pension will use up LSA and LSDBA of 25% of 25 times the pension in payment at the time of the relevant BCE. If they get this pension tested against the LTA by taking a small BCE now then they may be able to get a transitional tax free amount certificate to reduce the allowance usage from the default position. this should mean that this won’t be tested against the new regime and they can get a TTFAC.
The offshore pension doesn’t come into the equation.
SSAS pension crystallised prior to A Day. Client retains uncrystallised benefits, one of which is a stand alone Lump Sum. Will his pre A Day pension still be valued as 25 x his max drawdown income at the point he converted to Flexiaccess drawdown and should he crystallise pre April?
The pre commencement pension valuation basis is broadly the same as currently with the addition of the multiplication by 25% to identify the new allowance usage. SALS permitted maximum is capped at the April 23 value. Whether to crystallise or not is an advice matter based on circumstances. A SALS now would use up 25% x the amount crystallised on the default basis for LSA and LSDBA. Post April 100% of the tax free amount would be deducted from the LSDBA.
Are you saying anyone who has taken pre A day benefits and have over current LTA and/or Protected LTA now should request transitional TFC cert ?
If these benefits were tested against the LTA then a TTFAC can be applied for and could result in higher allowances. Whether or not that is of benefit depends on individual circumstances.
So if my client with a pre 06 pension in payment that is in excess of the LTA (no BCE yet)crystallises £1 of her uncrystallised fund before Apr, she will be able to take max LSA after Apr, but if she doesn’t crystallise anything before Apr, she won’t get the LSA?
She will still have a LSA, but this will be used up by 25% of 25 times the pension in payment at the time of having a relevant BCE in the new regime. If she has that small BCE this year then she can apply for a TTFAC and get more allowance than if she doesn’t get this tested against the LTA assuming they can prove the tax free amounts paid pre A-day.
We have a client fully crystallised, now having used 100% of his LTA, with a pre-A day DB pension having used about 50% of his LTA. Even though he is fully crystallised can he go back and claim a further entitlement to TFC?
Based on this, the client can apply for a TTFAC. The legislation at first suggested you only counted the PCLS and non taxable amount of UFPLS for a TTFAC. The logical conclusion was that your pre 06 pension would be £0 as they did not exist. But HMRC have said that the tax free amounts paid before April 2006 would need ot be included. Whether they will get any more lump sum allowance will depend on whether the total amount of tax free money they have had to date is lower than the tax free amount on the default transitional basis.
If a pre 2006 pension (e.g. Armed Forces) was put in payment prior to A-day and some tax-free cash paid, how would that tax-free cash be considered (if at all) in the context of TTFAC? For context, same individual also crystallised SIPP benefits post 2006 and was limited in PCLS due X25 multiple.
When they crystallised the SIPP benefits the pre commencement pension used up LTA on the 25 times pension basis. This has then used up 25% x the LTA used % x £1,073,100 of the LSA and LSDBA. Whether they will get any more lump sum allowance will depend on whether the total amount of tax free money they have had to date is lower than the tax free amount on the default transitional basis.
Regarding the pre A day pension in payment where no post A day LTA test has yet taken place and client has uncrystallised pension: we have a client in this position but is already over 75 so is it now too late to get a retrospective BCE on the pre 6/4/ 24 crystallisation?
They had a BCE at their 75th birthday. So the pre commencement pension has been tested. As the age 75 BCE had no tax free amounts of lump sums attached then they may be able to apply for a TTFAC to get a potentially higher LSA depending on the level of tax free cash paid previously. Individual circumstance would dictate if that were a benefit, there would be no LSDBA benefit as death benefits post 75 are taxed fully.
Ref pre A day pension in payment, client paid LTA tax charge @ age75 but pension still uncrystallised. Does age 75 count as BCE?
It is a BCE and will have used up LTA and will have triggered a deemed BCE on the pre 06 pension. The client is likely to be able to apply for a TTFAC.
