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Tax-free cash under the lifetime allowance rules

With the introduction of Fixed Protection 2012, Fixed Protection 2014 and Individual Protection in addition to the existing Enhanced Protection and Primary Protection, this article is designed to summarise the calculations for each circumstance.

These are not comprehensive notes.

Under the pensions legislation introduced on 6 April 2006 the general rule for the provision of tax-free cash from a registered pension scheme is that the maximum tax free cash sum that is available is the lower of 25% of the individual's unused standard lifetime allowance or 25% of their fund values if lower. However, many people in occupational pension schemes had accrued a tax free cash entitlement under the old pension legislation that exceeded 25% of the fund value. Due to these differences rules were introduced for the clients to protect this higher amount.

Scheme protected tax-free cash exceeding 25% and the interaction with protection of lifetime allowances

Many people had built up an entitlement to tax free cash (TFC), available from their pension schemes, greater than 25% of the fund value prior to the inception of Pension Simplification on 6 April 2006. In order for these members not to be disadvantaged by the new pension rules, legislation was introduced to protect this level of TFC within their pension schemes going forward until benefits were taken. There were certain restrictions on how this protection would be maintained when pension rights are transferred between schemes (block transfers and scheme wind ups).
When the member subsequently decides to take their pension benefits the amount of protected tax-free cash that can be payable will be recalculated at that point. There are two elements to this calculation:

  • Revalue the A-Day protected cash value by 20%, and
  • an 'additional lump sum amount' equivalent to 25% of the growth in pension rights since A-Day. This second part of the calculation differs if a member has Fixed Protection 2012/14 or Individual Protection.

From April 2014 there will be 4 variances to the calculation of the “additional lump sum amount” depending on the type of lifetime allowance protection the member has.
The formula for the additional lump sum amount (ALSA) is:

ALSA = current value of uncrystallised pension funds – (A-Day value of uncrystallised pension funds x (current LTA/£1.5million)) x 0.25

The value of current LTA in the formula will be:

Individuals with no other LTA protection

This also includes individuals with Primary or Enhanced Protection but no TFC protection

Current LTA will be a value of £1.25 million.

Individuals with Fixed Protection 2012

Current LTA will be a value of £1.8 million

Individuals with Fixed Protection 2014

Current LTA will be a value of £1.5 million

Individuals with Individual Protection

Current LTA will be their individual protection lifetime allowance. Under individual protection the client will have their own personal LTA based on their fund value as at 6th April 2014. For this calculation the client will use this figure as the current LTA in the formula above.

Examples: A Day protected TFC and Fixed Protection/Individual Protection

A client has an A Day protected TFC sum valued at £80,000 with an A Day fund value of £200,000. The client is looking to take his benefits in the tax year 2014/15 with a standard LTA of £1.25 million with a current fund value of £300,000. The calculation will be done in 2 parts;

The first part of the calculation is the same whether or not the individual has lifetime allowance protection. You take the A Day TFC sum of £80,000 and increase it by 20%. The result is £96,000.
The second part of the calculation will be different, depending on whether the individual has no lifetime allowance protection, fixed protection, or individual protection.

No protection:
£300,000 - (£200,000 x £1.25/£1.5 million) x 0.25 = £33,333

Fixed protection 2012:
£300,000 - (£200,000 x £1.8/£1.5 million) x 0.25 = £15,000

Fixed protection 2014:
£300,000 - (£200,000 x £1.5/£1.5 million) x 0.25 = £25,000

Individual Protection:
The calculations will be as above with the client using their personalised individual protected amount.
£300,000 - (£200,000 x Individual LTA/£1.5 million) x 0.25 = £----

The table below shows the effect of the different LTA values of an additional fund growth of £100,000 if taken after 5 April 2014.

Type of LTA protection ALSA tax free cash amount
None £33,333
Fixed 2012 £15,000
Fixed 2014 £25,000

Protected TFC and Enhanced Protection

Any client who has Enhanced Protection and a protected TFC sum greater than £375,000 will have this recorded on their Enhanced protection certificate as a percentage. The percentage figure recorded will identify the amount that can be taken as TFC from each scheme held by this client. These subsequent changes in the LTA have no effect on this entitlement.

Protected TFC and Primary Protection

Protected TFC under Primary Protection was given as a monetary amount on any Primary Protection certificate that was issued. If there was no monetary amount stated no protection had been granted. Any monetary amount would have been increased in line with the increase with the LTA and this will apply to the LTA increases up to £1.8 million. However, due to the consequences of the changing legislation this TFC value may vary depending on circumstances and may be revalued.

First BCE and TFC sum paid after April 2014

The available TFC figure stated at A Day will be increased in line with the increase in the LTA to £1.8 million (i.e. increased by 20%.

Example: TFC at A Day of £500,000 would be increased by 20% so £500,000 x 1.2 = £600,000).

Previous BCE with TFC and next BCE after April 2014

In these circumstances you will still enhance the original monetary amount by 20%. However, for the pre April 2014 monetary sum taken as TFC you will apply the formula of; £1.8/the LTA applicable at the point of the calculation. Once this calculation has been done (providing a slightly larger TFC monetary amount), this sum will be taken away from the original protected monetary amount increased by 20% and this will give you the available TFC sum left for any future TFC payments.

Example – A client has a protected TFC amount under Primary Protection of £500,000 and is looking to encash £1 million. He had previously encashed £250,000 in tax year 2008/09 when the standard LTA was £1.65 million and took TFC of £100,000. To discover what his remaining TFC entitlement is we need to revalue the original TFC taken based on the calculation above, so £100,000 x £1.8 million/£1.65 million = £109,090.90. So the remaining TFC available is £500,000 - £109,090.90 = £390,909.10. 
These calculations will have to be done for each event the client has where TFC is being taken. The formula will always start with the figure of £1.8 million until such time as the LTA exceeds this figure in the future

People with a protected LTA but no TFC protection

For individuals with Primary or Enhanced Protection and no TFC protection, the TFC will be restricted to the lower of 25% of their pension fund value or 25% of £1.5 million (the standard LTA applicable at application for these types of protection).

For Fixed Protection 2012 it will be the lower of 25% of the fund value and 25% of £1.8 million (the protected LTA) and Fixed Protection 2014 it will be the lower of 25% of the fund value and 25% of £1.5 million (the protected LTA). Individual Protection will use the same formula but apply this to their personal LTA granted.

In all cases consideration will need to be given within these figures to any other LTA events that have previously been taken to remain within these limits.

  Maximum Tax Free Cash Available
Standard TFC The lesser of 25% of the member’s scheme rights and 25% of their unused standard Lifetime Allowance.
Enhanced LTA – Pension Credit, overseas enhancement, transfer from Overseas schemes The lesser of 25% of the member’s scheme rights and 25% of the unused standard Lifetime Allowance.
Primary Protection/Enhanced Protection but no LS protection The lesser of 25% of the member’s scheme rights and 25% of their unused Lifetime Allowance (Lifetime Allowance capped at £1.5m for this purpose).
Primary Protection LS protection A Day protected cash amount increased by 20%, less the adjusted value of any lump sum already taken.
Enhanced Protection LS protection The percentage of the members scheme rights detailed on the enhanced protection certificate.
Fixed Protection 2012 The lesser of 25% of the member’s scheme rights and 25% of their unused Lifetime Allowance of £1.8m.
Fixed Protection 2014 The lesser of 25% of the member’s scheme rights and 25% of their unused Lifetime Allowance of £1.5m.
Individual Protection The lesser of 25% of the member’s scheme rights and 25% of their unused individual protection Lifetime Allowance.
Scheme Specific LS protection The lesser of the scheme revalued protected tax free cash* and the members remaining lifetime allowance**, but note that it will not be possible for the individual to take the entire value of their pension rights as a tax free lump sum.


* If revalued protected tax free cash exceeds the value of the pension fund a small amount of the fund must be used to provide a pension benefit which could itself be taken as a trivial taxable lump sum.
** For the purpose of determining whether there is any remaining lifetime allowance to pay the protected tax free cash lump sum the remaining lifetime allowance is their based on their personal lifetime allowance which may be more than the standard lifetime allowance.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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