The M&G Wealth Technical Team are set and ready to answer your questions. Here they respond to the most commonly requested answer around the LTA and taking pensions benefits pre April 2024?
The world of pension planning was dominated in 2023 by the abolition of the Lifetime Allowance due to take effect from 6 April 2024.
Draft legislation issued in the summer was incomplete but did give us a good idea of where things were headed. There were many known unknowns.
A policy statement issued alongside the Autumn Statement and the subsequent Autumn Finance Bill means that, whilst there are still several areas of clarity required by scheme administrators on the admin side of things, we’re broadly there on the planning side of things. It goes without saying that the bill could change as it goes through parliament. With a budget planned for 6th March we expect the bill to be enacted prior to this date.
The question we have been getting asked the most since the budget, and more so with the recent publications is:
“I have a client who has used up 100% of their LTA already and they still have some uncrystallised money. Should we be crystallising their benefits before April 2024.”
Clearly this will be a particularly individual decision based on clients full circumstances but there are some general principles to think about.
If you are going to advise on a course of action based on someone’s lifetime allowance tax position it should be linked to a clear, reasonable objective and put the person (or their beneficiaries) in a better position. Alternative ways of meeting the objective should be considered. Clearly any disadvantages or risks should not outweigh the benefit. Finally, does it pass the “why now?” test.
Assuming they do not want to withdraw the money from the pension system then the course of action for most would be designating the excess amounts into drawdown.
There are two areas at play technically. Only one is a possible advantage.
The reason many consider designating this year is the LTA charge for amounts designated above the allowance is 0%. But next year there is no test at all as only lump sums use allowances in the new world so the same thing can be achieved. I’m not sure that gets us passed the “why now?” test.
The second point is new and brought to us by the Autumn Finance Bill. Lump sum death benefits that are paid from rights that crystallised before 6 April 2024 will not be considered “relevant lump sum death benefits”, will not use up the new Lump Sum and Death Benefit Allowance, so will be tax free.
So there we have an advantage. But it is only an advantage where someone may die pre age 75, the death benefits are paid within 2 years, they are paid in lump sum form and the lump sum will be over the new allowance. The standard LSDBA for someone who has used 100% of their LTA would be £804,825 (unless part of that 100% was down to a serious ill health lump sum). Barring illness or accident most people live beyond age 75. But what if you were to die pre 75 and the scheme were in a position to pay within 2 years of them being aware of your death?
In that case where that scheme allows beneficiary death benefits in income form then as long as there are suitable nominations to allow an income death benefit to be taken then the benefits are not tested against the LSDBA. And, after designating as beneficiary drawdown you could take all your fund income tax free.
So perhaps there is a niche benefit for someone who wants their money to be paid to a discretionary trust and hedge their bets in case they do meet their maker pre 75. There would be a downside for them of waiting if they ended up dying pre 75 and were still minded to have their money paid to a trust and that amount was over the new LSDBA – a tax bill!
For the vast majority they would end up in the same place whether they do it now or wait until after April. There is an alternate solution to acting now.
Downsides to acting before April? Yes!
One of the features of the new regime is that those who have used 100% of their LTA are deemed to have used all their lump sum allowance of £268,275. However, if enacted as planned, those who have had less tax-free cash can on supplying suitable evidence to a scheme get a “transitional tax free amount certificate”. This would allow those who have had lower tax free amounts (or none) to have tax free cash going forward from April. This would not be possible to take from a drawdown pot.
Let’s say Roy used all his LTA taking a scheme pension with no tax free cash (and has the evidence to prove it). Tom used all his LTA when the allowance was £1million and has only had £250,000 tax free cash. Post April both can get tax free cash, which certainly in the money purchase world is usually beneficial.
Also, the overseas transfer allowance comes along in April. You can transfer up to the equivalent of your Lump Sum and Death Benefit Allowance to a QROPS without using your UK allowances. It appears that you could then take up to 25% of your fund tax free from the overseas scheme. You can of course transfer pre April without an LTA charge but it is not entirely clear whether tax free cash would be available as 100% LTA had been used in the UK. The QROPS regime we enter from April appears to allow double allowances as the UK and overseas benefits and allowances do not look like they interact.
For those who have pensions valued in excess of the LTA but have not used their full LTA yet there are further considerations. And based on current word count not getting covered here!
When asked if those who have used their LTA should use up their uncrystallised funds prior to April I think the answer is: If your client is over 75 and/or they have always taken their full tax free cash entitlement (except where LTA was lower than the current amount) and are not interested in transferring overseas then it doesn’t really matter. There may be the possibility of a death benefit advantage. But that can be attained by being in a pension scheme where your beneficiaries can access beneficiary drawdown, which should be doable for most unless there are power of attorney/incapacity issues. And those with LTA issues should really be in one already!
If their death benefits are destined for a trust then there’s a potential advantage from pre April 24 action as long as there’s no material PCLS / ability to go to QROPS disadvantage.
But what if Labour reintroduce the LTA? Think about that if and when it looks likely! You’ve right up to the eve of a first post Labour election victory budget to consider that one. And why start the growth you’d potentially need to deal with at a future LTA test now?
