TTAFC Allowances

Following the well-publicised removal of the Lifetime Allowance (LTA) for pensions from the beginning of the 24/25 (6^th April 2024), two new allowances related to pensions were created in its place. Trust the Government to remove one allowance, only to introduce two more!

Before we get ahead of ourselves – a brief reminder. The LTA for pensions was the amount that an individual could save into pensions, and subsequently take from pensions, before being hit with an additional tax bill. Potentially up to 55%! The last LTA figure before it was abolished was £1,073,100. This remains an important figure, even with the removal of the LTA.

The maximum tax-free lump sum that could be taken from pensions (those without any protected tax-free cash entitlement) was £268,275. This is 25% of the old LTA figure.

Now, rather than allowing tax-free lump sums from pensions that are greater than this figure, the Government has brought in the Lump Sum Allowance (LSA). This allowance is also £268,275, effectively maintaining the same maximum tax-free lump sum amount as if the LTA was never abolished.

The second new allowance is called the Lump Sum & Death Benefit Allowance (LSDBA). This allowance essentially mirrors the last figure for the LTA (£1,073,100) and limits the amount that can be paid out to beneficiaries as a lump sum on death of the pension holder. Any amount greater than the remaining LSDBA is potentially liable to income tax. Any tax-free cash taken from pensions during life will gradually reduce this death benefit allowance over time.

Claiming what you are entitled to

As a result of the rule changes over the years, you may be entitled to greater LSA and LSDBA amounts than HMRC currently have on record for you. This will likely be the case if you took tax-free lump sums from your pensions at times when the LTA figure was different from £1,073,100. It has changed 10 times since its introduction in the 2006/2007 tax year.

HMRC calculate your remaining LSA and LSDBA allowances using £1,073,100 as the starting figure as this was the last LTA amount. However, their calculation will be incorrect if you took tax-free cash in any of the years shown above in which the LTA was not £1,073,100.

If you think that you might be one of those people, please let us know. We are working through our records to determine and get in touch with those of you who may need to apply for a certificate to reinstate the tax-free cash allowances that you are entitled to. These are called Transitional Tax-Free Amount Certificates (TTAFC). Apologies for all the acronyms throughout this piece!

Whilst the LTA has officially been abolished, it still casts a relatively large shadow over the pension planning landscape.