From the 6 April 2024, there have been some changes to how death benefits and lump sums are taxed from the UK.
At this point it is important to state that, where a Double Tax Treaty exists between the host state (in this case the Czech Republic) and the state where the pension is based, this will determine how pension benefits are ultimately taxed. Nevertheless, we felt this information to be important for some with UK pensions that may retire back in the UK or another jurisdiction (and for those concerned about how their funds could be taxed after death, especially where the beneficiary may be in the UK).
In essence, if you have any intention of returning to the UK, this information cannot be ignored as it may lead to an increased tax bill for you or your beneficiaries.
There’s no longer an upper limit on the amount of pension funds or benefits that can be built up without tax charges. However, two new allowances have taken its place – the lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA). These will limit the amount of lump sums that can be paid tax-free (from the UK) during an individual’s lifetime and on their death.
Tax-free cash (from the UK) in the form of pension commencement lump sums (PCLS) and the tax-free amount of uncrystallised funds pension lump sums (UFPLS) or defined benefit schemes will be tested against both the LSA and the LSDBA.
What is the issue?
This cannot be properly covered in a short blog and so we are providing a summary.
The new allowances are £268,275 for the LSA and £1,073,100 for the LSDBA. Individuals who have the fixed or individual protections will have their LSDBA at the level of their protected lifetime allowance and their LSA at 25% of that figure. (Are you still with us?).
Some may end up paying more tax than they have to either now or in the future when benefits are subsequently taken. Though, this might not be known until sometime in the future.
Abbreviations Key
LSA – Lump Sum Allowance
LSDBA – Lump Sum and Death Benefit Allowance
PCLS – Pension Commencement Lump Sum
UFPLS – Uncrystallised Funds Pension Lump Sums
TTFAC – Transitional Tax-Free Amount Certificate
RBCE – Relevant Benefit Crystallisation Event
What is Default Usage?
These new allowances will be adjusted where the individual has used up some (or all) of their lifetime allowance prior to 6 April 2024.
The default calculation will consider the amount of lifetime allowance already used, and 25% of that will be deducted from both the LSA and LSDBA. If all of the lifetime allowance has been used, then the available LSA and LSDBA are both deemed to be zero.
The issue here is that it assumes that 25% was taken as a tax-free lump sum every time benefits were crystallised prior to 6 April 2024, which may not have been the case. To deal with this, people can apply to HMRC for a transitional tax-free amount certificate (TTFAC), potentially allowing 25% tax-free cash (from the UK) to be taken with future withdrawals where otherwise there would be no tax-free cash (from the UK). This may also increase the LSDBA which may be important where a lump sum death benefit is likely to be paid to beneficiaries.
Certification
Should individuals be able to show that the PCLS they’ve taken before 6 April 2024 is less than 25% of their amount of lifetime allowance used, they can ask their pension scheme to produce a TTFAC. This certified figure will be the amount deducted from their LSA and LSDBA.
The PCLS the individual has taken will be the actual monetary amount and this differs from the standard method where the lump sums are change in line with changes in the lifetime allowance.
A TTFAC must be in place before the first relevant benefit crystallisation event (RBCE) occurs from 6 April 2024 onwards. Hence the reason, some may wish to look at this issue now rather than after they have started taking benefits (post April 2024)
(An RBCE is the payment of a tax-free lump sum, so no PCLS or UFPLS can be taken until a TTFAC is granted. If an RBCE occurs before a TTFAC is granted, then the certification method cannot be used and the standard calculation will always apply).
In other words, if you do not apply before then you may have a future higher tax liability that cannot be avoided subsequently.
Summary
This is likely to affect those with larger UK pensions in certain circumstances or those with multiple benefits from various schemes, especially, but not only, defined benefit schemes.
