New tax year, new challenges, extra chocolate

The most recent budget didn’t seem to be the most exciting. No major changes were announced, which felt like a relief for most financial planners. So why have we and other retirement planners spent so much time studying (whilst eating more Easter eggs than we should) to make sure we are up to speed for 2024/25?

It’s not because of the UK ISA (despite appearances, this is just something the Treasury is consulting on) or because of the new general ISA rules (which mean that you can contribute to several different cash or stocks and shares ISAs in the same tax year).

It’s the removal of the Lifetime Allowance for pensions which has resulted in the Sussex Retirement Planning team having its collective head stuck in a book over the Easter holiday. You would imagine that the removal of a complex set of regulations would mean that we might be able to actively start to forget things. However, simplicity and fairness are at opposite ends of a continuum, as far as tax and pension rules are concerned. And, on this occasion, those who write the tax rules, have opted for fairness.

The removal of the Lifetime Allowance does mean that pension planning for many people is simpler than it used to be. When you reach the age of 75, if you still have a pension fund, you won’t need to do a complicated calculation to work out if you have any tax to pay as a result of having a large pension fund – there won’t be a tax charge when you are 75, so no calculation will be required. If you don’t have a large pension fund or final salary entitlement, and if you have never withdrawn money from a pension, then things should also be simpler (although there are some exceptions where this isn’t the case!).

However, it will still be necessary to do some calculations when you withdraw a lump sum from a pension as there is a maximum amount you can have tax free, over the course of your lifetime (known as the Lump Sum Allowance – at least the name is straightforward!). For 2024/25, the maximum amount is £268,725. So, people will just need to keep a note of how much they have withdrawn in tax free lump sums so far and deduct that from £268,725. The amount that you can withdraw tax free will be the result of this calculation, or 25% of your remaining uncrystallised pension fund. “Simples” as some cuddly puppets might say!

Unless… this might result in you losing out.

If that’s the case, then you can apply for a Transitional Tax Free Cash Certificate.

There are a few reasons why you might lose out, as a result of the removal of the Lifetime Allowance – the most common group of people who could lose out are those who had protection under the old Lifetime Allowance. Now, I’m not going to explain what this was – if you have protection, you will have a certificate to prove it! If you have one of these certificates, it might be a good idea to get one of the new certificates too. There are some other groups who can benefit from getting one of the new certificates too.

But not everyone will benefit from getting one of the new Transitional Tax Free Cash Certificates. In fact, for some people, the new certificate could result in the amount of tax free cash being less than it was before. Incidentally, the certificates will be issued by the administrators of pension schemes, and pension providers.

You would imagine that, if you applied for a certificate, and it made things worse, you could just throw the certificate away and carry on as before. But this isn’t that sort of certificate. Once you apply for a certificate, there’s no turning back. If the certificate makes things worse, then that’s just tough – you’ll get a smaller tax free lump sum than if you hadn’t bothered applying! Likewise, if you don’t apply for one before you withdraw your first tax free lump sum after 6th April 2024, and you would have been entitled to a higher lump sum with a certificate, then that’s tough too – you can’t get a backdated certificate.

There will be instances where the amount of tax free lump sum which could be lost will be substantial. This is the first time I have come across a rule like this (and I have been involved with pensions for over 35 years now!), and, to me, it does seem pretty unreasonable.

Fortunately, there is a solution to this problem – we can help you to work out whether you should apply for a Transitional Tax Free Cash Certificate. We will be letting our existing clients know if they should apply, but it will be part of our service to new clients too.

The Lump Sum Allowance is, however, just one of the two new allowances which is replacing the Lifetime Allowance. The other is called the “Lump Sum and Death Benefit Allowance”. You’ll probably be pleased to know that I’m not going to explain this allowance in this blog; Transitional Tax-Free Cash Certificates can be useful as a way of increasing this allowance too, but the same potential disadvantages could apply here too.

The removal of the Lifetime Allowance means that, first of all, most people will need to keep evidence of how much they have received as a tax free lump sum from all of their pensions, throughout their lifetimes, and, then, answer an additional question, before they take money out of their pension “Should I apply for a Transitional Tax Free Cash Certificate”. The first may be just an administration task for everybody over the age of 55; the second is complicated and there is a risk that you could lose out. The final rules were only revealed in the run up to Easter – and that’s why we have had our heads stuck in a proverbial book, making sure that we can give the right advice to our clients. I’m just pleased that chocolate is a good brain food!

Stop:Press – On 4 April 2024, HMRC announced that some of the legislation relating to the abolition of the lifetime allowance (LTA) does not work as intended and will need to be amended. I may need more chocolate…

Philip Wise |

Managing Director and Chartered Financial Planner

This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Cover will cease on insurance products if premium payments are not maintained.
A pension is a long-term investment and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.

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