Transitional arrangements, explained

Since 6 April 2024 the lifetime allowance has been replaced with new allowances. For clients who took some benefits under the old rules, their allowances in the new regime will be reduced. As part of our Bitesize Technical series, Senior Technical Consultant, Lisa Webster, looks at the transitional arrangements for those who used some lifetime allowance.

• The new lump sum allowance and lump sum and death benefit allowance.
• How the standard transitional calculation works.
• When the standard transitional calculation is applied.

Watch the bitesize video now or scroll down to read through the key talking points.

Key insights on the transitional arrangements

What are the new allowances?

There are new allowances for lump sums, namely the Lump Sum Allowance or LSA, and the Lump Sum and Death Benefit Allowance or LSDBA.

If 100% of the lifetime allowance was used, will there be any allowances available under the new rules?

If 100% of the lifetime allowance has been used, then this means there will not usually be any allowances available under the new rules.

How does lifetime allowance usage impact the new lump sum allowance?

If less than 100% of the lifetime allowance was used, then the new lump sum allowance – used when calculating maximum PCLS – will be reduced by 25% of the lifetime allowance used.

How does lifetime allowance usage impact the new lump sum and death benefit allowance?

In most cases the lump sum and death benefit allowance will reduce by the same amount as the lump sum allowance. The exception is if the lifetime allowance was used up by taking a serious ill health lump sum, or by paying out a lump sum death benefit in relation to the member who died before age 75. In these cases, then the lump sum and death benefit allowance is reduced by 100% of the lifetime allowance used.

Are benefits that were crystallised under the old rules tested again when the member dies?

Any benefits crystallised before 6 April 2024 aren’t tested against the lump sum and death benefit allowance, even if they are paid out as a lump sum on death.

Are the new allowances always reduced in the same way?

The calculations talked about here are standard calculations which will take place at the first relevant benefit crystallisation event on or after 6 April 2024.

If these calculations don’t reflect the amount of tax-free lump sums actually taken, and appropriate evidence can be obtained, it may be possible to apply for a transitional tax-free amount certificate, which can be used instead.

More Bitesize Technical

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