Lisa Webster: Tricky transition for pre A-day pensions

As a much-changed Parliament gets up and running, we pension techies eagerly await the long overdue regulations to correct the drafting errors in this year’s Finance Act. Some of the rules around the lifetime allowance removal do not work quite as intended and there is an element of limbo until these are resolved. Another area causing confusion is the treatment of pre A-day pensions, or pre-commencement pensions if you prefer, when working out how much lump sum allowance (LSA) or lump sum and death benefit allowance (LSDBA) is left. For those who first started taking their pension on or before 5 April 2006, before the lifetime allowance existed, and who didn’t have a benefit crystallisation event (BCE) between 6 April 2006 and 5 April 2024, they will never have used any lifetime allowance. If they still have uncrystallised funds and now take a PCLS, or they die under 75 and lump sum death benefits are paid from those uncrystallised funds, then their new allowances (LSA and LSDBA) will both be reduced by 25% x 25 x annual rate of pension. Whether they took any tax-free cash at the time is irrelevant – a standard formula is used. What’s more, clients in this scenario are not eligible to apply for a transitional tax-free cash certificate so don’t get the second bite of the cherry available to those that gave up PCLS under the lifetime allowance. Those with pre A-day pensions who also had a BCE under the lifetime allowance, be that taking further benefits or an age 75 test, are eligible to apply for a certificate. But the rules around this don’t work as you might think, and we are seeing transitional certificate enquiries that don’t benefit the client. Crucially, when calculating the lump sum transitional tax-free amount and lump sum and death benefit transitional tax-free amount, it is always assumed that 25% tax free cash was taken from the pre A-day fund. This means that there is only likely to be a significant advantage to applying for the certificate if less than 25% tax free cash was taken at the BCE under the lifetime allowance (which could include an age 75 test). There will be some marginal winners but – importantly – also some marginal losers in the scenario when the standard 25% PCLS was taken under the BCE. This will be largely down to the level of the lifetime allowance when the BCE occurred. If BCEs happened when the lifetime allowance was higher, then that’s likely to mean the standard calculation gives a better outcome, and the opposite if it was at a time when the lifetime allowance was lower. However, you also need to balance this with the fact that the pre A-day pension may be paid at a higher level the more recent the BCE, which impacts how much lifetime allowance they will have been deemed to have used up at that time. The moral of the story is to look at each client’s position on an individual basis to ensure a certificate doesn’t make them worse off. If you have any doubts, it might be worth checking with the provider before an application is made, as the law doesn’t allow the provider to reject a correctly completed application even if it’s in the client’s interest to do so. Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster

Lisa Webster: Tricky transition for pre A-day pensions

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