Take care with pre A-Day pensions

The new pension rules for clients accessing their pension for the first time are relatively simple. Only lump sums are tested and there are two new allowances.

As ever, it is when we come to transitional arrangements that things get trickier.

Clients who took benefits under the old lifetime allowance will have their new allowances reduced. For most the reduction will be determined by the standard transitional calculation, for others a transitional tax-free amount certificate may be more appropriate.

And then we come to those clients who have even older pensions that they accessed before the lifetime allowance was introduced back in 2006. For these clients there is an additional level of complexity.

Clients with pre A-day pension will fall into one of two categories – those that had a benefit crystallisation event (BCE) under the lifetime allowance, and those that didn’t.

Looking at the those who didn’t first.

As they’ve had no BCE their benefits have never been tested against the lifetime allowance. If they still have uncrystallised funds and they want to take a lump sum in the future, or a lump sum is paid out from them on their death before age 75, then these lump sums will be tested against the new allowances. The standard transitional calculation has to be adjusted, as there is no lifetime allowance percentage to plug into it. Instead, the allowances are reduced by 25% x 25 x annual rate of pension payable.

Effectively this means that the calculation always assumes that 25% tax-free cash was taken from the pre A-day pension. It’s also worth noting that these clients don’t have the option of applying for a transitional tax-free amount certificate.

Turning to clients who did have a BCE.

This could be clients who took further benefits in the period 6 April 2006 – 5 April 2024, or those who didn’t take further benefits, but had their 75th birthday with unused funds, or funds in drawdown.

When the BCE occurred there would have been a deemed reduction to their lifetime allowance in respect of their pre A-day pensions. This means the standard transitional calculation is simpler, as it uses the total lifetime allowance used, including the deemed reduction, when establishing the allowances remaining.

Where it gets complicated though, is applying for transitional certificates for these clients. Unlike those who didn’t have a BCE, they are eligible for certificates, but they may not benefit clients as much as you think and could even put them in a worse position.

This is largely because the certificate, like the standard transitional calculation, always assumes that 25% tax free cash was taken in relation to pre A-day pensions. So instead of the certificate calculation giving a remaining lump sum allowance of £268,275 less the total tax-free lump sums taken, it gives a remaining lump sum allowance of £268,275 less any tax-free lump sums taken under the lifetime allowance, less 25% x deemed lifetime allowance reduction in respect of pre A-day funds.

In practice this means that there is only likely to be a significant benefit to applying for a certificate if there was less than 25% tax free cash taken under the lifetime allowance period. There may be cases where there is a marginal benefit – or loss – depending on the lifetime allowance at the time the deemed reduction was carried out, but it is vital that each case is looked at on an individual basis and a comparison made before an application is made for a certificate.