The M&G technical team examine what we know to date about the LTA changes, as indicated in the draft legislation and other related HMRC announcements.
Note: The content of this article is based on the team’s understanding of the draft legislation and other related HMRC announcements as at 20th September 2023.
The LTA has been replaced with two new allowances. The Lump Sum Allowance (LSA) and the Lump Sum and Death Benefits Allowance (LSDBA).
From April 2024 only the non-taxable amounts of lump sums will be subject to a test against limits. Benefits in excess of the limits will suffer marginal rate tax.
Almost all mentions of benefit crystallisaton events are removed from the law however there will be new “relevant benefit crystallisation events” (RBCEs) impacting benefits.
Lump Sum Allowance (LSA)
The standard allowance will be £268,275. There are no provisions for increasing this allowance.
Those with LTA protections will have a LSA based on their protected LTA (e.g. a member with Fixed Protection 2014 will have a LSA of £375,000 (25% of £1.5m).
Further information on the PCLS amounts for specific protections are covered in Pension Commencement Lump Sum.
The LSA will be reduced based on any RBCE’s that occur, or have occurred.
RBCEs are defined for the LSA as being a “relevant lump sum”, these are;
• a pension commencement lump sum,
• an uncrystallised funds pension lump sum,
• a trivial commutation lump sum, or
• a winding-up lump sum.
It is only the non-taxable amount of the above lump sums that are deducted from the allowance.
For the PCLS detailed above it will be the whole amount of this, for the remaining three it’s the “non-taxable amount” that is taken into account (i.e. if a £100,000 UFPLS is taken and £25,000 of that was non-taxable, it’s £25,000 of the LSA that is used up).
The LSA is included in the calculation of pension commencement lump sum that is payable post 5 April 2024.
Further areas of clarity are required
• Small Pots are to be treated for tax purposes as trivial commutation lump sums. This would seem to mean the non taxable amount of a small pot would use up LSA. We do not believe this is the intention but await further guidance.
• Standalone Lump Sums and Transitional 2013/14 lump sums are tax free lumps sums but are not technically pension commencement lump sums. We assume these should be included as RBCEs but await further guidance.
• We do not know if pre commencement pensions or income BCEs between 2006 and 2024 will use up LSA
Lump Sum and Death Benefits Allowance (LSDBA)
The standard allowance will be £1,073,100. There are no provisions for increasing this allowance.
Those with LTA protections under the old rule will have a LSDBA based on their protected LTA (e.g. a member with Fixed Protection 2014 will have a LSDBA of £1.5m).
Those with Enhanced Protection will have their LSDBA set at the value of benefits that could have been taken on 5 April 2024.
The LSDBA will be reduced based on any RBCE’s that occur, or have occurred.
The RBCEs that reduce the LSDBA are wider than those that reduce the LSA.
These are the aggregate of:
• the non-taxable amount in relation to each authorised lump sum (if any) to which the individual has previously become entitled, and
• the non-taxable amount in relation to each authorised lump sum death benefit (if any) in respect of the individual to which any person has previously become entitled.
Whilst there is doubt about whether a standalone lump sum or transitional 2013/14 lump sum reduces the LSA, as they’re not one of the authorised lump sums specifically called out, they will reduce the LSDBA.
A previous serious ill health lump sum would be deducted under the first bullet above.
Additionally, at the first RBCE that occurs the value of any pre commencement pensions i.e. any pension in payment prior to 6 April 2006, will be factored in at a rate of 25 times the pension in payment or 25 times the maximum GAD rate and use up LSDBA.
Any benefits that are taken when the member has run out of LSDBA will be taxable at the member or beneficiaries marginal rate of taxation.
On the members death the remaining LSDBA that the member has (broadly speaking the starting LSDBA (£1,073,100 for those with no protections) less any LSA used by the member) can be used to pay an authorised lump sum death benefit to the member. Benefits paid out to a beneficiary that are under the LSDBA, will be free of taxation. Benefits above the LSDBA will be taxable at the recipients marginal rate of tax.
Further areas of clarity are required
• Small Pots are to be treated for tax purposes as trivial commutation lump sums which are authorised lump sums. This would seem to mean the non-taxable amount of a small pot would use up LSDBA. We do not believe this is the intention but await further guidance.
• It is unclear whether pre commencement pensions that were previously valued at a 2006 to 2024 BCE need to be revalued at the first RBCE.
• The tax treatment of beneficiary drawdown and annuities is yet to be confirmed.
• Some authorised lump sums e.g. refund of excess contribution lump sums, do not currently use up LTA so we are unclear why they would use up LSDBA.
You can read the original article and view a video on the subject on the M&G Wealth website HERE.
