DB pension now uses up tax free allowance - even though no tax free cash taken?

GC1234567

I recently started taking a DB pension from a past employer, which, on commencement, used up a percentage of what was then the Lifetime Allowance. So far, so good. 

My most recent letter from the scheme however now says taking that pension has also used up part of my Lump Sum Allowance, which is the total amount anyone can take from all their pension schemes as tax-free cash. This, even though I have never taken tax free cash from the scheme.

Even though it isn't a huge pension by any means, it has used up a significant proportion of my tax free allowance. I queried this with the scheme, and all they could say was there had been lots of queries, but, yes, the rules had changed.

So taking a DB pension now uses up your tax free pension allowance, even though no tax free cash has been taken?  Is this correct? Am I missing something? 

GenX0212

Did you get a lump sum when you started drawing the DB pension? The lump sum forms part of your Lump Sum Allowance.

dunstonh

My most recent letter from the scheme however now says taking that pension has also used up part of my Lump Sum Allowance, which is the total amount anyone can take from all their pension schemes as tax-free cash. This, even though I have never taken tax free cash from the scheme.

Not an uncommon scenario.  There are a number of other similar scenarios with that outcome.

So taking a DB pension now uses up your tax free pension allowance, even though no tax free cash has been taken?  Is this correct? Am I missing something? 

Yes you are missing something.  Transitional tax-free amount certificates can be applied for to overrule the lifetime allowance conversion.

Marcon

GC1234567 said:

I recently started taking a DB pension from a past employer, which, on commencement, used up a percentage of what was then the Lifetime Allowance. So far, so good. 

My most recent letter from the scheme however now says taking that pension has also used up part of my Lump Sum Allowance, which is the total amount anyone can take from all their pension schemes as tax-free cash. This, even though I have never taken tax free cash from the scheme.

Even though it isn't a huge pension by any means, it has used up a significant proportion of my tax free allowance. I queried this with the scheme, and all they could say was there had been lots of queries, but, yes, the rules had changed.

So taking a DB pension now uses up your tax free pension allowance, even though no tax free cash has been taken?  Is this correct? Am I missing something? 

You are under transitional rules.

The standard calculation will normally deduct 25% of the LTA used up by benefits taken before 6 April 2024,  where (as here) no tax-free cash was taken. That's the default option - but there is an alternative. Have a look at https://techzone.abrdn.com/public/pensions/Tech-guide-tax-free-cash and scroll down to the section headed 

Alternative calculation - transitional tax-free amount certificate (TTFAC)

if you want full chapter and verse!

Albermarle

You can probably apply for the TTFC to the DB pension provider.
As mine has a poor reputation for responding to anything, I applied to my DC pension provider instead.
I had to fill in a form and provide evidence that I had not taken any tax free lump sum when I started my DB pension, and I now the proud owner of a TTFC.
In practice what it means is that when I start to drawdown from the DC pension, I will start with 100% of the lump sum allowance intact.

Of course if you will never have any possibility of being able to withdraw more than £280K in tax free cash ( as your funds are not big enough) then you do not really need to go through the exercise. I am still quite a way off, but the £280K is likely to stay frozen for many years, so maybe at some point with some investment growth I might be glad I got the certificate.

GC1234567

GenX0212 said:

Did you get a lump sum when you started drawing the DB pension? The lump sum forms part of your Lump Sum Allowance.

No, no lump sum taken

GC1234567

Albermarle said:

You can probably apply for the TTFC to the DB pension provider.
As mine has a poor reputation for responding to anything, I applied to my DC pension provider instead.
I had to fill in a form and provide evidence that I had not taken any tax free lump sum when I started my DB pension, and I now the proud owner of a TTFC.
In practice what it means is that when I start to drawdown from the DC pension, I will start with 100% of the lump sum allowance intact.

As I uderstabd it though, a TTFC can only be applied for before one has taken any DC contributions? I have just taken my first amount from one of my DC schemes

DRS1

GC1234567 said:

Albermarle said:

You can probably apply for the TTFC to the DB pension provider.
As mine has a poor reputation for responding to anything, I applied to my DC pension provider instead.
I had to fill in a form and provide evidence that I had not taken any tax free lump sum when I started my DB pension, and I now the proud owner of a TTFC.
In practice what it means is that when I start to drawdown from the DC pension, I will start with 100% of the lump sum allowance intact.

As I uderstabd it though, a TTFC can only be applied for before one has taken any DC contributions? I have just taken my first amount from one of my DC schemes

So have you taken a tax free lump sum since April 2024?  I think you are meant to apply when you first take post April 2024 benefits.

GC1234567

DRS1 said:

GC1234567 said:

Albermarle said:

You can probably apply for the TTFC to the DB pension provider.
As mine has a poor reputation for responding to anything, I applied to my DC pension provider instead.
I had to fill in a form and provide evidence that I had not taken any tax free lump sum when I started my DB pension, and I now the proud owner of a TTFC.
In practice what it means is that when I start to drawdown from the DC pension, I will start with 100% of the lump sum allowance intact.

As I uderstabd it though, a TTFC can only be applied for before one has taken any DC contributions? I have just taken my first amount from one of my DC schemes

So have you taken a tax free lump sum since April 2024?  I think you are meant to apply when you first take post April 2024 benefits.

Unfortunately yes, I took my first tax free lump sum a month ago

Albermarle

GC1234567 said:

Albermarle said:

You can probably apply for the TTFC to the DB pension provider.
As mine has a poor reputation for responding to anything, I applied to my DC pension provider instead.
I had to fill in a form and provide evidence that I had not taken any tax free lump sum when I started my DB pension, and I now the proud owner of a TTFC.
In practice what it means is that when I start to drawdown from the DC pension, I will start with 100% of the lump sum allowance intact.

As I uderstabd it though, a TTFC can only be applied for before one has taken any DC contributions? I have just taken my first amount from one of my DC schemes

Yes I think you are right.

DRS1

I wonder if you can ask them if you can get a TTFC now.  You could say you have only just found out about it - but did the DC scheme ask you lots of questions about the TFLS and LSA when you took it (including whether you had a TTFC)?

Of course perhaps the figures mean this is not an issue for you even with the reduced LSA.  Presumably there is a 25% limit on the TFLS you can take from the DC scheme.  Is that likely to exceed the reduced LSA (including the TFLS you have already taken)?