From 6 April this year, the new ’lump sum allowance’ came into effect. But what does this rule change mean for pension savers?
Rule changes
The new rules assume, for the sake of simplicity, that those who took pension benefits prior to 6 April 2024 received 25% of their pension value as tax-free cash. The new lump sum allowance entitlement has, as a result, been fixed at £268,275 (25% of the former LTA of £1,073,100) for most pension savers.
However, savers may be eligible to draw further tax-free cash from a defined contribution pension in certain scenarios. Three examples of this scenario include:
- If the saver took a final salary pension income, but did not draw tax-free cash.
- If there was a pension with a generous guaranteed annuity rate.
- Where pension benefits were accessed at age 75.
Under the previous rules, these scenarios would have counted towards the LTA, meaning no tax-free cash could be released from any other pensions (assuming the LTA was reached). Any lump sum taken would have been taxed at 55%. Under the new rules, however, an eligible individual may now be able to unlock further tax-free cash.
How to claim a backdated tax-free lump sum
To be able to benefit from this change, an eligible saver must calculate their pre-April 2024 tax-free cash elements using the new ’transitional tax-free amount certificate’ method (the standard calculation method is 25% of the previously used LTA). This must be submitted to your pension plan provider before the first tax-free amount is taken after 6 April 2024. If it is not, the ability to use the transitional tax-free amount certificate method is lost.
Future financial planning opportunities
In addition, and due to this change, there may now be an opportunity to make tax-efficient pension contributions and benefit from future tax-free payments from a pension, even for individuals who have not been able to previously due to LTA protection, or because they have reached the LTA ceiling.
Please request our Tax-saving tips for pensions factsheet for further reading on how pensions can be used to lower your tax bill. Or get in touch with one of our experts on 03300 564 446, or via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
