‘I’m at an impasse with my pension provider – why has my tax-free cash ‘run out’?’

‘i’m at an impasse with my pension provider – why has my tax-free cash ‘run out’?’

pensions doctor

Write to Pensions Doctor with your pension problem: [email protected]. Columns are published weekly. Becky O’Connor is away.

Dear Charlene,

Please could you guide me on a current dispute I am having with my self-invested personal pension (Sipp) provider relating to my Lifetime Allowance (LTA).

I retired in January 2010, taking my company pension. I used up approximately 40pc of my lifetime allowance (LTA), which at that time had a £1.8m limit.

I also had a Sipp which was running and in 2020, when I was 75, the fund was crystallised. As the LTA limit had reduced to just over £1m it became necessary for me to make a payment to HMRC of approximately £30,000.

I was told at that time the tax-free allowance available was around £156,000.

A couple of years ago I set up a drawdown account and have been transferring money from the Sipp and at the same time taking 25pc tax-free.

I recently requested a further transfer and release but have now been told that due to the new rules I have used up the limit.

Since the transfers I have taken – tax-free – around £100,000 with just over £55,000 left.

I accept that in total I have exceeded the £268,000 current limit, but surely my tax-free allowance was crystallised and calculated under the old rules in 2020?

I also paid tax on the figure that exceeded the LTA. If the new rules are now applied to me, am I able to reclaim the tax I paid when there was an LTA limit, which does not apply now?

Surely HMRC cannot claim under both the old and new rules?

Would appreciate your view on the matter.

Regards,

David

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Dear David,

There are two issues that are stopping you getting the answers you need, and I can understand your frustration. I’ll address them both and try to shed some light on how the old and new rules interact.

It’s worth saying at this point that your case is both complex and unusual, and involves multiple changes to LTA legislation, some of which have only recently been introduced. With that in mind, you should proceed very carefully and may want to think about getting professional financial advice to help avoid a costly misstep.

The LTA has been abolished and most people now have a lump sum allowance of £268,275. This allowance is designed to cap the tax-free lump sums you can take from your pensions in your lifetime.

If you’ve accessed a pension before April 6 2024, then you would’ve used a percentage of the LTA at the time.

There’s then a standard calculation to work out how much of the new lump sum allowance you’ve got left. For most people, it involves multiplying the total percentage of the LTA you’d used (before April 6) by £1,073,100, and taking away a quarter of this amount from the new lump sum allowance of £268,275. If you’d already used up 100pc of your LTA, you’d have no remaining lump sum allowance. If someone has protection from the LTA, the starting allowances in the calculation will be higher.

The standard calculation assumes you took 25pc of the value of your pension(s) tax-free each time you accessed. This might be the case for most people, but doesn’t cover everyone. It’s not clear if you took as much as 25pc of the value of your company pension in 2010 as tax-free cash.

You also reached age 75 with Sipp funds you hadn’t accessed yet. Although they were tested against the old LTA at age 75 (which meant a £30,000 tax charge in 2020), you didn’t actually take any more tax-free cash then.

Where the standard calculation might not work as intended, HMRC will let you apply for a “transitional certificate” (from an existing pension provider) that adjusts the calculation to put you in the correct tax position. Instead of applying a straight 25pc, the certificate will show the exact amount of tax-free lump sums you’ve received, which is then deducted from your lump sum allowance.

This means people could get the chance to take more tax-free cash, when on the face of it the new rules might not allow it.

There are two things to be careful of with transitional certificates:

  1. You must apply for a certificate before you access a pension again (to take more tax-free) for the first time since April 6 2024; but also
  2. Applying for a certificate is irreversible, even if it puts you in a worse position.

Anyone who is thinking of applying for a transitional tax-free cash certificate should consider getting financial advice.

Assuming you’ve taken around £100,000 worth of tax-free lump sums since you turned 75, the actual amount of tax-free lump sum you took from your company scheme back in 2010 needs to have been less than £168,275 for a certificate to give you a chance of more tax-free cash.

You’ll need to get evidence of the amount actually paid to you as a tax-free lump sum at the time if you think this might be the case.

Another reason I’d strongly suggest getting proper advice is to see if there is any chance of you being able to apply for LTA protection. Although the LTA has been abolished, it is still possible to apply in some circumstances.

If you’re not able to take any more tax-free cash (for example because a certificate or protection is not possible), then I’m afraid you’re unable to claim back the tax you paid at age 75 either. I appreciate this might not be the news you were looking for.

A potential certificate is the first issue, the second is what pension schemes feel able to tell customers. I’m trying to fathom why they’ve not explained their position in more detail – either exactly why you cannot get any more tax-free cash, or whether a certificate is possible.

In my view, you’re either able to apply for a certificate that might give you more tax-free cash than the “standard” rules and calculation, or alternatively, you aren’t able to apply for one, for a specific reason. Either way, it would be useful if they could clarify their position in more detail to you.

There’s a high chance they are worried about overstepping what’s known as the “advice boundary”. Only a regulated financial adviser can give you personal advice on your own situation and tell you what you “should” do. Beyond that, the line on what guidance they can give you gets blurred, and your scheme could be worried about pointing you in a direction that could lead to a poor outcome because of the complex rules.

There is work ongoing between the Treasury and the Financial Conduct Authority to address these blurred lines and empower providers (including pension schemes) to give more guidance and targeted support to their customers to help them make better informed decisions.

Although you’re currently being told you have no more tax-free cash allowance and arguably nothing to lose, I should point out again that applying for a tax-free cash certificate is an irreversible decision and could put people in a worse position than before that they won’t be able to undo.

I hope I’ve given you enough to help you overcome this impasse with your pension provider – whether or not it leads to the chance for more tax-free cash, or at least a complete answer and the final word on why it doesn’t.

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