Savers have been warned they could end up paying more tax if they make the wrong decision when calculating their tax free lump sum following the abolition of the lifetime allowance.
Speaking to FT Adviser, Andrew Tully, technical services director at Nucleus, pointed to an option called transitional tax-free amount certificate, which clients can apply for to help them calculate the amount of tax free lump sum they have left after accessing their pension.
The certificates were highlighted in HMRC's latest lifetime allowance guidance newsletter, published this week (February 13), and will become relevant after the abolition of the LTA, which will introduce a cap on the amount people can take from their pensions tax free - typically £268,275 unless certain protections are in place.
The certificates are relevant for clients who have accessed but not yet taken their maximum pension commencement lump sum.
But the tax authority has warned asking for them can backfire and result in a lower available allowances than under the standard transitional calculation.
This is because "there is no opportunity to revert to the standard calculation once a transitional tax-free certificate has been granted,” meaning it is not possible to compare allowances under each calculation, and committing to one over the other could result in a loss for the client.
The standard transitional calculation assumes an individual took 25 per cent of any previous crystallisation as tax free cash. But with the transitional certificate the monetary amount of tax free cash received is deducted from the new lump sum allowance (see case study).
It is asking people to gamble on which route will be best, and many, especially those without advisers, will end up paying more tax than they shouldTully said this area was very complex, made worse by the fact decisions are irreversible, therefore people needed to be careful, and best speak to an adviser before proceeding.
He said: “This is a hugely complex situation where it’s very difficult to know the outcome until full calculations are done.
“Asking people to choose whether to go down a one-way street without being able to reverse back to the ‘normal’ position feels a very poor customer outcome.
“It is asking people to gamble on which route will be best, and many, especially those without advisers, will end up paying more tax than they should.”
The certificates will have to be requested from the pension schemes before the first relevant benefit crystallisation event on or after April 6 2024.
To help advisers and their clients M&G Wealth has created a tool to work out whether clients could benefit from a transitional tax-free amount certificate or not.
Les Cameron, head of M&G Wealth’s team of pension and tax technical experts, said: “Tax-year end is rapidly approaching and the LTA abolition is providing an added twist.
"The number one question we’re being asked is whether clients will be able to access more tax-free cash under the new rules, so we’ve developed an easy-to-use tool based on three simple inputs to provide the answer, which we believe is the first of its kind."
amy.austin@ft.com
