The new regime
The new position from 6 April 2024
From 6 April 2024
Summary
From 6 April 2024, the LTA is abolished. There is no longer a specific limit on how much pension savings an individual can build up in their lifetime.
Annual pension is taxed at the member’s marginal rate and two new lump sum allowances are introduced. The new allowances are only used up by the payment of relevant tax-free lump sums, not pensions. This is a change from the previous practice under the LTA, where both pensions and lump sums were assessed.
BCEs are removed, other than when they are needed for annual allowance purposes ie where annual allowance legislation refers to including benefits at a BCE in the closing balance calculation.
BCEs are replaced by Relevant Benefit Crystallisation Events (RBCEs). An RBCE takes place when a relevant lump sum is paid and a check against the new lump sum allowances is performed.
The testing of uncrystallised benefits at age 75 is abolished from 6 April 2024. In the LGPS benefits must be paid by age 75. Previously, where it was not possible to do this (eg because you could not trace the member), you were required to carry out a BCE 5 check at age 75. From 6 April 2024, an RBCE will occur at the date the member has an actual entitlement to a relevant lump sum.
The LSA is set at £268,275. It limits the amount of tax-free cash an individual can take. The LSA is used up when a member takes payment of the following relevant lump sums:
- a pension commencement lump sum (PCLS)
- an uncrystallised funds pension lump sum (UFPLS)
- a stand-alone lump sum (SALS).
An UFPLS can only be paid by LGPS Scotland. SALSs are not payable from the LGPS.
It is only the tax-free element of an UFPLS that reduces the LSA. Where a SALS is paid under condition C, the LSA is reduced by 25 per cent of the SALS. For all other SALSs, the LSA is reduced by the tax-free element of the SALS.
There is no provision within the legislation for the LSA to increase with inflation.
The LSDBA is set at £1,073,100. It limits the amount of tax-free cash that can be taken by an individual and paid in respect of them when they die.
LSDBA is used up by the following relevant lump sums:
- a pension commencement lump sum
- an uncrystallised funds pension lump sum
- a stand-alone lump sum (SALS)
- a serious ill health lump sum (under 75)
- a relevant lump sum death benefit.
It is only the tax-free elements of UFPLSs and SALSs that reduce the LSDBA.
A relevant lump sum death benefit does not include a lump sum death benefit paid in respect of rights that were crystallised before 6 April 2024. These lump sums do not reduce a member’s LSDBA.
There is no provision within the legislation for the LSDBA to increase with inflation.
Relevant Benefits Crystallisation Events (RBCE)
The definition of an RBCE is found in section 637 of the Income Tax (Earnings and Pensions) Act 2003.
An RBCE can only occur from 6 April 2024. Tax-free lump sums paid at an RBCE that are within the LSA and LSDBA will reduce the amount available of that allowance at any future RBCE.
Lump sums paid in excess of the LSA and LSDBA are taxed at the individual’s or beneficiary’s marginal rate.
Where the member has more than one RBCE on the same day, they must decide what order they are taking their benefits in and inform both scheme administrators. This works in the same way as under the LTA regime where a member had more than one BCE on the same day.
Where more than one lump sum death benefit is payable, in relation to a deceased member, the RBCEs are treated as occurring:
- immediately before the member’s death
- immediately after any PCLS to which the member became entitled immediately before death.
See the section on Paying lump sum death benefits for more information on this.
Availability of the LSA and LSDBA
Summary
From 6 April 2024 when you pay a relevant lump sum, you need to check it fits within the member’s available LSA and LSDBA.
To do this you need to ask members if they have crystallised any pension benefits previously. We have prepared a ‘Previous pension benefits declaration form’ to help you obtain this information from members.
If a member fails to provide the information, HMRC’s Pensions Tax Manual (PTM) states that you must assume the individual has no lump sum allowances available.
The standard LSA and LSDBA may be increased if the member holds a valid LTA protection or has a valid LTA enhancement factor. See members with LTA protections.
From 6 April 2024, relevant lump sums paid at an RBCE reduce the amount of LSA and LSDBA available for future RBCEs.
If a member has had a BCE or taken a pre-commencement pension, transitional rules apply. The transitional rules also reduce the amount of LSA and LSDBA available.
If a member is entitled to a lump sum before 6 April 2024, but payment is not made until after that date, it is also subject to the transitional rules. Lump sums are assessed on the date the member has an actual entitlement – see when to assess a PCLS.
BCEs – 6 April 2006 to 5 April 2024
If a member has had one or more BCEs, these events must be reflected when calculating their available LSA and LSDBA. The standard transitional calculations are:
- the available LSA is reduced by 25 per cent of LTA previously used
- the available LSDBA is reduced by the appropriate percentage which is:
- 100 per cent of the LTA used in respect of SIHLS paid under age 75
- 100 per cent of lump sum death benefits if the individual was under age 75 at the time of their death, and the benefit was paid to a person (rather than the personal representatives) within the two-year period
- otherwise, 25 per cent of the LTA previously used.
If a member has taken less than 25 per cent of their used LTA as tax-free lump sums previously, they or their personal representatives may wish to apply for a transitional tax-free amount certificate. The certificate will set out the total of the relevant sums the member was entitled to before 6 April 2024. See Transitional tax-free amount certificates for more information.
A pre-commencement pension is a pension that was in payment before 6 April 2006.
Members with pensions in payment before 6 April 2006 will also have a reduction to the standard LSA and LSDBA. The standard transitional calculation reduces the LSA and LSDBA by 25 per cent of the capital value.
- capital value = P × 25
Where P is the annual pension at the date of the RBCE (not at 5 April 2006).
However, if the pre-commencement pension is being taken as a drawdown pension different rules apply. Guidance on how to calculate the capital value for these is provided in archived PTM088300.
However, you will not use these calculations if a member with a pre-commencement pension has also had a BCE or RBCE.
Previous BCE
If the member had a BCE (between 6 April 2006 and 5 April 2024), they will have had a ‘deemed BCE’ in respect of their pre-commencement pension. They may have received a BCE statement from the pension scheme in which their first BCE after 5 April 2006 occurred. The statement should detail the amount of LTA that was deemed used up by the pre-commencement pension.
Previous RBCE
If the member has not had a BCE but has had an RBCE (from 6 April 2024), they will have had a ‘deemed RBCE’ in respect of their pre-commencement pension. They may have received an RBCE statement from the pension scheme in which their first RBCE after 5 April 2024 occurred. The statement should detail the monetary amount of LSA and LSDBA used up by the pre-commencement pension.
See PTM164400 and archived PTM088300 for more information about pre-commencement pensions and deemed BCEs.