A dozen reasons to boost pension pots before April
Techzone looks at the pension funding opportunities to be considered before the tax year end.
Removing the pension lifetime allowance (LTA) is no easy feat. The existing pension rules are littered with references to it, affecting all aspects of pension saving.
While this removes the cap on tax-efficient pension funding, in its place will be two new allowances:
New pension rules from 6 April 2024 have now received Royal Assent and our team of experts have been analysing the detail and the impact these changes will have on retirement advice.
We have prepared a number of articles on our Techzone site focusing on how the new rules might affect your clients across different areas such as funding, taking benefits and on death.
Techzone looks at the actions that may need to be taken (or not taken) by individuals ahead of the removal of the lifetime allowance from 6 April 2024.
In the meantime, the most topical content and frequently asked questions will be shared here to help you keep up to date.
As more information becomes available from HMRC on the practical application of these changes, we will continue to share our insight and take some deeper dives into how this will shape advice from 6 April.
For most clients their LSA will be reduced by 25% of the LTA used up by benefits taken before 6 April 2024.
However, the new rules provide an alternative if clients can evidence the tax-free cash they’ve actually received in the past is less than 25% of the LTA used - they can apply for a ‘transitional tax-free amount certificate’ (TTFAC) confirming the aggregate amount to be deducted from the individual’s available LSA. For some clients this may increase the remaining LSA and, therefore, more tax-free cash than under the standard calculation.
Read our Techzone Insight to understand which clients may benefit from applying for TTFA.
This may be unnecessary if the intention is to take death benefits as inherited drawdown. As this is pension income and not a lump sum, it is not tested against the new LSDBA. And of course, inherited drawdown still allows the flexibility to take a lump sum if one is needed. Clients will need to be certain their scheme offers inherited drawdown and that relevant death benefit nominations are in place.
Lump sum death benefits from funds crystallised before 6 April 2024 will not be tested against the new LSDBA. This has prompted many to suggest that clients who have used up their LTA and still have uncrystallised funds should crystallise benefits now to take these funds outside of the LSDBA calculations.
There are some scenarios where clients might still wish to take death benefits as a lump sum rather than inherited drawdown. Read our Techzone Insight to discover when crystallising now may give a better outcome.
The individual must submit complete evidence of their lump sum transitional tax-free amount and their lump sum and death benefit transitional tax-free amount to the registered pension scheme. Complete evidence must always account for the total amount of lifetime allowance used so that a scheme administrator can determine the portion of the pension benefits that were taken as tax-free lump sums.
It is for the scheme administrator to decide if the evidence provided is sufficient. They will need to consider the evidence on a case-by-case basis.
We will accept the following as evidence of tax-free cash taken from other providers:
NB – letters don’t have to be dated at the time of event; we will accept a recent letter from scheme.
We will accept original documents, a photocopy or a photo of the letter on an email.
You could also provide as additional supporting evidence to the BCE certificate:
Evidence must be uploaded to the client’s document library.
The rules confirm that providers have 3 months to issue the TTFAC from the date of application. If we don’t receive sufficient evidence within this 3 month period, we must cancel your request. You can reapply on behalf of your client but only where you are able to provide sufficient evidence.
Draft guidance has been issued by HMRC on the rules around obtaining a Transitional Tax Free Amount Certificate (TTFAC). An individual (or the individual’s personal representatives if the individual is deceased) may apply for a certificate to any registered pension scheme of which they are a member. Individuals may wish to apply to the registered pension scheme under which they crystallised most of their pension benefits prior to 6 April 2024, or under which they expect to have their first relevant benefit crystallisation event after this date.
An individual must apply for a certificate before the first relevant benefit crystallisation event, after 5 April 2024. It is not possible to apply after the first relevant benefit crystallisation event - an individual can only apply once. Drip feed drawdown which includes a TFC element is considered a relevant benefit crystallisation event. Once your client has received their TTFAC, it is binding and cannot be revoked so it is important before applying that you ensure that a TTFAC is the right option for your client.
To apply for a TTFAC, please:
Important Points to Note:
We have now updated our Techzone site to reflect the new allowances. We cover which clients might benefit in this Insight and also in this practical guide. We will be adding more detail on this topic shortly.
If your client has LTA protection and you haven’t told us about it already, please get in touch to let us know. This will ensure this information is not lost when it comes to crystallising benefits in the future.
You can do this by uploading supporting evidence to your clients' Wrap or Elevate document library and then emailing nontelephony.drawdown@abrdn.com for Wrap and for Elevate elevate_enquiries@abrdn.com to confirm.
Aspects of this topic are still subject to change as confirmed by HMRC in their latest Newsletter.
HMRC are updating the Pensions Tax Manual which is another valuable source of guidance.