PENSION COMMENCEMENT LUMP SUMS FOR INDIVIDUALS WITH ENHANCED OR PRIMARY PROTECTION
With the introduction of the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA) we have new methods for testing the maximum tax-free cash sums available to individuals. Whilst the standard overall cap remains at £268,275, the protection of pre-existing pension rights is a standard feature of the pension landscape often adding additional layers of complexity, even when governments seek to simplify regulations. Some of the longest standing protection rules relate to tax-free cash rights originally calculated using a basis that applied to occupational pension schemes prior to 6 April 2006. These protected amounts carry forward into the new regime under enhanced, primary and scheme specific protection and details of how the maximums are calculated are provided below.
Primary Protection
Primary protection was introduced in April 2006 to provide a limited form of protection against the newly introduced (and now abolished) lifetime allowance. Primary protection also protected pre-existing tax-free cash rights if they exceeded £375,000 (including any benefits currently in payment). Where this applies, the protected tax-free cash amount is quoted on the primary protection certificate. Under the new rules, the maximum tax-free cash available is calculated as:
- Protected tax-free cash amount (as shown on the certificate) x 1.2, less
- Any tax-free cash taken since 6 April 2012, less
- Any tax-free cash taken between 6 April 2006 and 5 April 2012 increased in line with the lifetime allowance increases from date of crystallisation to 5 April 2012
Example
Michael has primary protection with tax-free cash protection stated on the certificate as £450,000. He crystallised benefits in June 2019 and took £300,000 as a tax-free cash sum. No other benefits have been taken. Under the post April 2024 rules, Michael’s remaining lump sum allowance is
- £450,000 x 1.2 – £300,000 = £240,000
Now, if the previous tax-free cash of £300,000 was taken in May 2006, it would need to be increased by the change in the lifetime allowance up until 5th April 2012. The calculation then becomes:
- £450,000 x 1.2 = £540,000 less
- £300,000 x £1.8m / £1.5m = £360,000
- 540,000 – £360,000 = £180,000
For individuals with primary protection which did not include protection for tax-free cash rights, under the new rules, they will have a lump sum allowance of £375,000. This amount is reduced using the standard transitional calculation, based on their lifetime allowance use as at 5 April 2024. Where appropriate these individuals could also apply for a transitional tax-free amount certificate, if they have not had a relevant benefit crystallisation event.
Enhanced Protection
As with primary protection, special rules apply to an individual’s tax-free cash rights if they exceeded £375,000 on 5 April 2006. From 6 April 2006, the maximum tax-free cash available from each crystallisation is expressed as a % amount on the enhanced protection certificate. However, since 6 April 2023, the maximum tax-free cash available from each arrangement is restricted to the maximum that could have been paid on 5 April 2023.
Example
Ian wants to take his maximum tax-free cash from his personal pension. He has enhanced protection with tax-free cash protection of 30% and a current fund value of £1,000,000. However, his fund value on 5th April 2023 was £800,000 and therefore the maximum tax-free lump sum available is 30% x £800,000 = £240,000. If Ian decided to crystallise just £500,000, the maximum tax-free lump sum available would be 30% x £500,000 = £150,000 and £130,000 would be the maximum available in future.
For individuals with enhanced protection that did not protect their tax-free cash rights, their lump sum allowance will be £375,000. For benefits crystallised between 6 April 2006 and 5 April 2024, the standard rules apply which reduce this amount by 25% of the LTA used. Where appropriate these individuals could also apply for a transitional tax-free amount certificate, if they have not had a relevant benefit crystallisation event.
Interaction with scheme specific tax-free cash protection
The rules for scheme specific protection do not apply to clients with tax free cash rights that are protected under enhanced or primary protection, but they can apply where this is not the case.
More information on scheme specific tax-free cash calculations can be found in the adviser update for February 2025.
Our Technical Services Team are on hand to answer any questions you may have including any client-specific cases you may have. They are available on (020) 7608 5330 or email technical_direct@integrafin.co.uk
All information is based on our understanding and interpretation of applicable law and regulation.
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