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Technical View

Technical View

Welcome to this month’s Technical View, where we look at the reduction in the lifetime allowance (LTA) from £1.25m to £1m. This will come into effect from 6 April 2016 and may have a beneficial effect on the calculation of a client’s protected Tax-Free Cash/PCLS entitlement.

Technical View aims to answer queries received by you, as a financial adviser for your use when you meet clients in similar scenarios. We hope that this provides useful, topical and valuable information.

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Overview of protected tax free cash sum

Some individuals will have had lump sum rights that exceeded 25% of their uncrystallised pension rights on 5 April 2006. In particular, this affects those in occupational pension schemes, or deferred annuity contracts (such as section 32 policies) before A-day (i.e. 6 April 2006). There is no need to claim this protection from HMRC as the legislation applies the protection to the individual automatically. The tax rules set out how the calculation of lump sum rights should be made in these circumstances and the conditions applying to the payment of the benefits. (For example, all benefits must be crystallised at the same time in order for the protected lump sum rights in excess of 25% to be paid.)

The calculation to determine the overall protected lump sum rights that can be paid at the time benefits are taken is a two stage calculation:  

  1. The client’s tax-free cash entitlement as at 5 April 2006 is revalued by 20% (being the increase in the LTA as at A-day of £1.5m and the underpinned LTA of £1.8m used in this part of the calculation formula).
  2. An additional amount of cash is available which represents 25% of the increase in value of the pension fund since 5 April 2006. This is applied after proportioning down the fund value as at 5 April 2006 to reflect the reduction in the lifetime allowance to below its value at 6 April 2006. 

The second part of the calculation is where the value of the policy as at 5 April 2006 is effectively discounted back by the reduction in the LTA between the date benefits are paid and the LTA of £1.5m that was in place at A-day.   

Below we look to demonstrate the calculation of the protected lump sum rights in example situations where benefits are crystallised before and after 6 April 2016.

Individual crystallises benefits on or after 6 April 2016 

Value @ 5 April 2006 £100,000
Scheme specific Tax-Free Cash @ 5 April 2006 £40,000
Value of fund at crystallisation date (assuming this is at a constant level, irrespective of the date benefits are crystallised) £130,000

Individual crystallises benefits on or after 6 April 2016

Step 1     £40,000 x 120% (£1.8m / £1.5m) £48,000.00
Step 2 (£130,000 -  [£100,000x £1.0m/£1.5m]  )  x 25%  £15,833.33


Individual crystallises benefits before 6 April 2016 

In these circumstances the overall protected lump sum rights that would be available is calculated as follows:- 
Step 1     £40,000 x 120% (£1.8m / £1.5m) £48,000.00
Step 2 (£130,000 -  [£100,000x £1.25m/£1.5m]  )  x 25%  £11,666.67

£ 59,666.67

As you can see based on the assumption that the formula used regarding how the “additional” amount of “tax-free cash” is calculated does not have any material changes between now and next April, potentially there could be additional tax free lump sum rights available from 6 April 2016.


  • In light of the new pension freedoms, clients may want to access their pension benefits now. For those clients who have protected tax free cash in excess of 25% within their pensions, as an adviser, it would be pertinent to talk to your clients and inform them of this potential uplift they may receive if they wait just a bit longer. And as mentioned earlier an important point worth noting is that for those clients with protected lump sum rights in excess of 25%, they would have to take all of their tax free cash at once and crystallise all rights within the scheme for the protection to apply.
  • This could be a key advice area over the next few months and financial advice taking into consideration all the client’s personal circumstances will be paramount. Of course another point to consider as to when benefits are crystallised is the reduction in the LTA itself to £1million from 6 April 2016.

Hopefully this edition has given some food for thought for clients with protected tax free cash amounts in excess of 25%. If you have further queries on the content of this edition or other technical queries then please contact the Technical e-helpdesk at technical@sanlam.co.uk.

Date issued: 11.11.15

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at November 2015 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

Past performance is no guarantee to future performance. The value of investments can fall as well as rise so investors could get back less than they invest.

Sanlam & Sanlam Investments and Pensions are trading names of Sanlam Life & Pensions UK Limited (SLP (Reg.in England 980142)) and Sanlam Financial Services UK Limited (SFS (Reg. in England 2354894)). SLP is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SFS is authorised and regulated by the Financial Conduct Authority. Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.