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As we enter a new political era, many will be thinking about what’s next for pensions. However, it’s important not to get caught up in what might be in store, but to remain focussed on making sure advice continues to reflect current pensions legislation.

For that reason, a clear understanding of the April 2024 lifetime abolition changes continues to be essential. As was widely commented at the time, the abolition did not mean there are no longer limits on the amount of pension savings individuals can access without incurring a tax charge. Instead, the lifetime allowance has been replaced by three new allowances to regulate tax-free benefits:

• Lump Sum Allowance, set at £268,275.

• Lump Sum and Death Benefit Allowance, capped at £1,073,100.

• Overseas Transfer Allowance, which also stands at £1,073,100.

The lump sum allowance and lump sum and death benefit allowance serve to limit the tax-free benefits that can be distributed to individuals. These new allowances are checked against when benefits are paid out. The allowance amounts may increase if the individual possesses lifetime allowance protection. For both allowances, those with valid LTA protection and/or lump sum protections will retain their rights to the higher protected amounts. Eligible individuals will be given until 5 April 2025 to apply for Fixed Protection 2016 and Individual Protection 2016. However, if benefits were taken between 6 April 2006 and 5 April 2024, these allowances will be lower.

The introduction of the Lump Sum Allowance (LSA) provides a more targeted approach towards regulating tax-free cash withdrawals from pensions, it functions similarly to the Lifetime Allowance (LTA) but specifically pertains to tax-free cash from pensions. The LSA sets a limit on the amount of tax-free cash an individual can receive over their lifetime, capping it at 25% of their pension wealth or £268,275, whichever is lower. Under the LSA, certain elements are taken into account when calculating the tax-free cash amount against the allowance, including tax free elements of UFPLS payments. Trivial commutation lump sums, winding up lump sums, and small pots lump sums are examples of such exclusions. As these were not considered under the previous LTA either, their tax-free components remain unaffected by the introduction of the LSA.

The Lump Sum and Death Benefit Allowance (LSDBA) is set at the last Lifetime Allowance (LTA) threshold of £1,073,100 and mirrors the LTA in many respects but introduces changes in how excess lump sums are taxed. Under the LSDBA, Pension Commencement Lump Sums (PCLSs) and the tax-free elements of Uncrystallised Funds Pension Lump Sums (UFPLS) are taken into account when calculating whether an individual has exceeded the allowance limit. This means that these lump sum withdrawals contribute towards reaching the LSDBA threshold. One significant difference between the LTA and LSDBA is how excess lump sums are taxed. Previously, under the LTA regime, any excess lump sums above the allowance were subject to a flat tax rate of 55%. However, under the LSDBA rules, excess lump sums are taxed at the individual’s marginal income tax rate as pension income.

Designation of normally taxable benefits into income-producing contracts aren’t tested against the LSA or LSDBA, so there’s no 25% tax charge for excesses over the old LTA. This situation bears resemblance to the conditions that were applicable in 2023/24 when the LTA was still in effect, but the tax charge was set at 0%. This means that under these circumstances, individuals do not face a tax charge for exceeding the previous LTA threshold if their benefits are transformed into income-producing contracts.

The Pension Commencement Excess Lump Sum (PCELS) is a new provision that allows for the payment of a taxable lump sum when the lump sum allowance has been fully utilised. The introduction of PCELS provides an additional option for individuals who have exhausted their lump sum allowance due to exceeding their lifetime allowance. By requiring the payment to be connected with a pension and imposing limitations on the maximum amount that can be received, PCELS aims to strike a balance between providing flexibility and ensuring responsible use of pension funds.

The Overseas Transfer Allowance (OTA) is a new allowance introduced to limit tax-free transfers overseas for individuals. Its primary purpose is to control the amount of money that individuals can transfer abroad without tax implications.

Above there has been reference to the various forms of transitional protection for the lifetime allowance that were in place before April 2024. The various forms of lifetime allowance protection often also protect the amount of tax-free cash. Even though the lifetime allowance itself is no longer applicable after April 2024, the protection for tax-free cash can still persists. One key aspect that remains unchanged post-April 2024 is the calculation of the tax-free lump sum, which continues to involve the concept of the applicable amount. This figure acts as a limit on the tax-free lump sum based on the capital value of the income benefits being distributed.

Another practical aspect of the new rules has been the transitional tax-free amount certificate, issued to an individual upon application. This certificate specifies the individual’s lump sum transitional tax-free amount and the lump sum and death benefit transitional tax-free amount. It is crucial for individuals to apply for this certificate before the first relevant benefit crystallisation event.

A transitional tax-free amount certificate can be beneficial for individuals in various circumstances, including:

Crystallisation Below £1,073,100 Lifetime Allowance: If any benefits were crystallised when the lifetime allowance was below £1,073,100, a transitional tax-free amount certificate can help in managing the tax implications of exceeding the allowance.

Serious Ill-Health Lump Sum Payment: Individuals who receive a serious ill-health lump sum payment may benefit from a transitional tax-free amount certificate to optimise their tax position.

Less Than 25% Tax-Free Cash Paid: Due to various reasons such as GMP Restricting Tax-Free Cash, Inclusion of Disqualifying Pension Credit or a Defined Benefit Scheme Not Following 25% Rule.

That is a whistlestop tour of some aspects of the new pension rules. With a new government in place, it is important that any advice continues to reflect present legislation, which is why an updated and clear understanding of the April 2024 changes continues to be essential.

NOTE: This is based on applicable pensions legislation at the time of writing.

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