Following the removal of the Lifetime Allowance (LTA), tax free lump sums from pensions are now limited by the Lump Sum Allowance (LSA) along with the Lump Sum Death Benefit Allowance (LSDBA).
The LSA is a limit on certain lump sums from pensions paid during the individual's lifetime and is set to £268,275.
The LSA may be higher if the individual has transitional protection. An individual's remaining LSA may be lower if they have already taken benefits.
Lump sums over the Lump Sum Allowance are taxed at the individual's marginal rate.
Lump sums which use up LSA also reduce the available LSDBA.
How is the Lump Sum Allowance applied in the software?
The software continues to model the LTA in 2022 and earlier years but will show the new regime for 2023 onwards.
By default, tax free cash (PCLS) is limited to 25% of the benefits being crystallised, capped by the amount of LSA remaining.
The Lump Sum Allowance will default to £268,275. The LSA is assumed to stay level in the software in accordance with current legislation.
After the start date of the plan, when a lump sum withdrawal is made from a money purchase pension or a lump sum taken from a final salary pension, the lump sum will be assessed against the remaining Lump Sum Allowance for that year.
Tip - if lump sums have been taken prior to the start date of the plan, or if the client has transitional protection, details of the remaining Lump Sum Allowance should be recorded in Carryover Assumptions (see below) so that the software can apply the correct LSA for the client.
For money purchase pensions, details of how much of a lump sum withdrawal is tax free and how much taxable can be seen in Year View > Pensions for the year of the withdrawal by clicking on the name of the pension the withdrawal is coming from:
The amount of the taxable lump sum will be added to their other income and taxed as part of the end of year tax calculation. This can be seen in Year View > Taxes in Employment and Other Income:
Details of the remaining LSA is not shown in the Year View but is recorded in the background. Once the Lump Sum Allowance has been exhausted, the full amount of the withdrawal will be taxable income:
For final salary pensions the breakdown between taxable and tax free does not show in the Pensions tab, only the total amount of the lump sum:
However, if the lump sum exceeds the available LSA, the excess will be added to their other income and taxed as part of the end of year tax calculation. This can be seen in Year View > Taxes in Employment and Other Income:
How to model that a client has already used part of their Lump Sum Allowance and/or has protected LSA
With no transitional protection
If the client has a already used part of their Lump Sum Allowance prior to the start date of the plan, and does not have transitional protection, this can be modelled by recording the amount of LSA the client has left at the start of the plan in Carryover Assumptions > Pension Allowance & Carry Forward > Remaining Lump Sum Allowance.
Using the standard calculation, normally 25% of the LTA used by benefits taken before 6 April 2024 is deducted from the LSA. For example, if the client had used 40% of their LTA, the amount to be deducted is 0.25 x 0.4 x £1,073,100 = £107,310. Remaining LSA is therefore £268,275 -£107,310 = £160,965.
It is the remaining LSA which is input in Carryover Assumptions:
Tip - If you do not see the Remaining Lump Sum Allowance field in Carryover Assumptions, check the start date of the plan. Plans starting in 2022 or earlier will show the LTA Used field instead.
With transitional tax-free amount certificate (TTFAC)
Transitional rules provide for an alternative calculation that can increase the remaining LSA compared to the standard calculation e.g. where pension benefits were taken with no tax free cash prior to 6 April 2024.
The software doesn't specifically model the transitional rules. If a client has a TTFAC, you would input the remaining LSA in Carryover Assumptions in the same way as clients with no protection.
With transitional protection
Pension protection is still relevant for the purposes of calculating the individual's LSA and LSDBA.
If the client has transitional protection, this can be modelled by recording which type of protection the individual has and the amount of their protected LSA they have left at the start of the plan in Carryover Assumptions > Pension Allowance & Carry Forward > Remaining Lump Sum Allowance.
Note - the software does not record what the individual's protected LSA was originally under transitional protection, only what remains of their LSA as at the start date of the Voyant plan.