Credit to Jo Cumbo for alerting us to a difficult issue for those lucky enough to have pension savings that can produce tax-free cash over the tax free cash allowance of £268,275.
Credit is due despite the trolling of her going on in the comments section of her article. For some trolls, Jo is pandering to rich people whose problems don’t deserve space in the FT, to others , she is not going into sufficient detail about lifetime protection and can get larger lump sums tax-free.
I thought I knew my way around this subject, but I find out – thanks to Jo – that I didn’t. I am sure I am not the only one.
Let me explain my case – I doubt I am unique.
I took my pension some time ago and have been receiving an amount from my scheme every month for which I am grateful. It pays the bills while I do fun things with AgeWage.
I did not take tax free cash when I commenced taking my DB pension, because I didn’t need the cash and because I worked out that in the long-term I’d do better by getting a bigger pension. I also thought that having a bigger pension would be an incentive for me to look after myself and so live longer!
Had I taken tax free cash, this would have counted against my capacity to take tax free cash from my pension pot into which I am still saving (I abandoned my lifetime protection long ago so I could continue to build my pot). I have now saved enough to be in happy danger of having to limit myself to £268,275 of tax free cash.
But it turns out that unless I follow a path to prove to HMRC , I didn’t take my tax-free cash, they will assume I did and will tax me on my still taken cash sum that they deem to be over my tax-free cash allowance. Weirdly, the burden is on me to prove to them that I didn’t take my tax-free cash (and they know I am getting a pension because I pay them tax on it!).
The point of Jo’s article is that if you are in receipt of a pension, the tax-free cash you have already taken is deemed to be part of the £268,275 and you’ll be taxed on your lump sum on the assumption that you’ve taken your tax free cash sum before this April, even if you haven’t. And it looks like you’ll have lost that tax for good unless you’ve got your paperwork in first. I am considering paying off my mortgage with my tax free sum and if that is to be reduced by up to 45%, that will leave me short of paying off my mortgage. That’s a pretty important thing for me and had Jo not written that article, I wouldn’t have known of the threat down the road.
So thanks Jo – I’ll put an anonymous comment to that effect on the FT site.
Doubling up the tax-free cash?
I hadn’t realised that the cap on tax free cash taken today is retrospective and cumulative. I may need some help from my readers here, but I had previously assumed that I could take my tax free cash from my DB pension and come back for double bubble from my personal pot, maybe I got that wrong, but I thought that was the right I gave up (question tax-experts – was my TFC always capped at 25% of my lifetime allowance (protected or otherwise)?
It certainly seems now that you’ll only get tax-free cash up to 25% of your lifetime allowance (including any remaining protection). If you have £1.8m protection – you obviously get a quarter of that amount (£450,000) , but you have to knock off any tax free cash you’ve had already and can’t get any more than £450k ever. So no double bubble.
I can see why all this has got so complicated now.
What to do if like me you’ve got to prove your innocence!
Annoyingly, proving you are innocent of taking your tax-free cash allowance already is up to you and the pension scheme/provider to whom you are applying to get your cash tax-free. You need to get a certificate. This is what HMRC is saying
An individual (or the individual’s personal representatives, if the individual is deceased) may apply for a certificate to any registered pension scheme they are a member of. Individuals may wish to apply to the registered pension scheme under which they crystallised the majority of their pension benefits prior to 6 April 2024, or under which they expect to have their first relevant benefit crystallisation event after this date.
An individual cannot make an application to a scheme they are not yet a member of. An individual cannot apply for a certificate if they have already had a relevant benefit crystallisation event occur on or after 6 April 2024. A certificate must be issued before a member’s first relevant benefit crystallisation event.
The individual must submit complete evidence of their lump sum transitional tax-free amount and lump sum and death benefit transitional tax-free amount to the registered pension scheme.
Complete evidence
An individual must submit complete evidence when applying for tax-free transitional certificate. Complete evidence must always account for the total percentage of lifetime allowance used so that a scheme administrator can determine the portion of the pension benefits that were taken as tax-free lump sums.
It is for the scheme administrator to decide if the evidence provided is sufficient. They will need to consider the evidence on a case-by-case basis. Some examples of appropriate evidence would be financial records, BCE statements or bank statements.
Without such evidence an application should be refused by the scheme administrator. Insufficient evidence is the only grounds on which a scheme administrator may refuse an application.
An individual can apply again for a certificate after being denied by a scheme administrator due to lack of evidence; however, complete evidence will need to be provided for this application to be reconsidered. A scheme administrator may request further evidence, but the response from the individual must be provided within the three-month window from when the application was first made. An individual can only reapply for a certificate on rejection if they have not yet had a relevant benefit crystallisation event.
Where an individual fraudulently or negligently makes a false statement, or a pension scheme administrator assists in providing a statement they know to be inaccurate, a penalty of £3,000 can be issued.
This is all new stuff to me, though (if you are prepared to declare you are a financial adviser) you can go on Royal London’s website and explore even more complicated situations than mine.
