Did You Take Lower Tax Free Cash for a Bigger Pension Income Annuity?

Published / Last Updated on 09/02/2024

Many people may have taken zero or even lower tax-free cash lump sums to secure a bigger pension income annuity at retirement.  This may have been:

  • From company defined benefit (guaranteed) schemes where a higher pension is offered for lower lump sums.
  • A defined contribution or investment linked pension with guaranteed annuity rates, so you took little or no lump sum for a bigger pension income.
  • You have crystalised (i.e., taken benefits) from a non-guaranteed pension fund, as an annuity again with little or no lump sum.

If you did this, do not to crystallise (take) any further pension benefits until you have taken financial advice or at least secured a Transitional Tax-Free Cash Amount Certificate.

In a previous video, we have highlighted that from 6 April 2024, the Lifetime Allowance (LTA) is abolished but new Lump Sum Allowance (LSA) rules and Lump Sum Death Benefit Allowance (LSDBA) rules from 6 April 2024.  Instead of being capped by the amount of pension fund you can build up through your lifetime (the LTA) you are restricted from April 2024 by being limited to a maximum lump sum taken through your lifetime of 25% of the current LTA i.e., 25% of £1,073,100 = £268,275.   This is the Lump Sum Allowance (LSA).

Read/Watch: LSA and LS&DBA

The LSA is no longer based upon %s of the LTA, it is a monetary amount of the LSA £268,275 less any previously taken lump sums.

For this very simple example (not entirely accurate but for illustrative purposes):  the LTA is currently £1,073,100 and “Karen” has a defined benefit pension offering her a pension of:

  • £26,827.50 pa income with no lump sum or an alternative or
  • £21,500 pa income plus a lump sum of £140,000 or
  • £23,000 pa income with a lump sum of £69,000.  This is the option that was taken.

(the above calculations have been simplified solely to illustrate the effect of a lower lump sum amount rather than the accuracy of the calculations below)

The multiple of pension for lifetime allowance is X 20, so £26,827.50 pa X 20 (HMRC multiple) = £536,550 LTA used.  This is 50% of the LTA.

Without action, under new LSA rules from 6 April 2024, Karen would be deemed to have taken 50% of the lump sum even if she did not.

  • LSA £268,275.
  • Deemed LSA used £134,137.50.
  • Unused LSA remaining £134,137.50.

Transitional Tax-Free Cash Amount Certificate.

Before crystallising i.e., taking any further benefits from other pensions, the individual should get a Transitional Tax-Free Cash Amount Certificate proving that they have only taken £69,000 (lower than what was available or deemed taken) and has a remaining Transitional Tax-Free Cash Amount of £199,273.

E.g.  Karen also has a SIPP/PPP worth £600,000.

Without a Transitional Tax-Free Cash Amount Certificate, Karen would be restricted to a lump sum of £134,137.50 – her remaining LSA.

With a Transitional Tax-Free Cash Amount Certificate of £69,000, Karen’s protected LSA would be £268,275 less £69,000 = £199,273.

This means her lump sum entitlement from her remaining SIPP/PPP is the lower of:

  • 25% of the pension fund £600,000 = £150,000
  • Remaining LSA on TFC Certificate = £199,273

This means that Karen can take £150,000 lump sum and not the unused LSA (without a certificate) or £133,137.50.

**IMPORTANT:  For some people by requesting a transitional certificate, if you had/have a protected (higher than the current £1,073,100) lifetime allowance (LTA) e.g.  £1.8m - £1.25m etc, and had taken a lump sum before 6th April 2024 less than 25% of your higher/protected LTA but greater than 25% of the current LTA £1,073,100, you immediately lose your ability to still draw 25% of the larger LTA once a transitional certificate has been issued and you cannot reverse the process.  This is a complex calculation that you need professional advice on before taking action.**

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