No Tax Free Sum. Was it ever available?

AllPaws4

My husband took his final salary pension in 2001 at age 50 as part of his redundancy with no penalty. 

He paid into a SIPP until age 63 when he retired. The Sipp was left untouched until now as he turns 75 this year. 

He has now been told he is not entitled to any tax free cash as the revalued pension exceeds the lifetime allowance. 

We have no reason to doubt this although it is annoying but it does raise a question as to whether our financial adviser should have spotted the potential issue earlier. 

Given we were receiving financial advice since 2014 was there ever a point when he should have been advised he could lose the option as the pension regimes changed from 2006 onwards?
I recognise that the lifetime allowance was variously £1.5m to £1.8m so the payments were probably well within those figures but as it came down should his pension in payment have been tested ? 

Dazed_and_C0nfused

AllPaws4 said:

My husband took his final salary pension in 2001 at age 50 as part of his redundancy with no penalty. 

He paid into a SIPP until age 63 when he retired. The Sipp was left untouched until now as he turns 75 this year. 

He has now been told he is not entitled to any tax free cash as the revalued pension exceeds the lifetime allowance. 

We have no reason to doubt this although it is annoying but it does raise a question as to whether our financial adviser should have spotted the potential issue earlier. 

Given we were receiving financial advice since 2014 was there ever a point when he should have been advised he could lose the option as the pension regimes changed from 2006 onwards?
I recognise that the lifetime allowance was variously £1.5m to £1.8m so the payments were probably well within those figures but as it came down should his pension in payment have been tested ? 

Do you really mean that or is it that there is a limit in what he can take as tax free cash?

AllPaws4

He has been told that there is a calculation done which is based on his pension payment in December when he requested the TFLS. Apparently the calculation is £50k x25 which is then tested against the £1,073,300 LTA and as it’s more, he’s not entitled to any tax free cash. It seems unfair as he took only £50k tax free back in 2001. 

Was there a point over the last few years when he would have been entitled to some tax free cash if he had been properly advised?

DRS1

This quote from M&G's note on transitional tax free amount certificates.  I am wondering if this is the issue here

"In addition, where there was a pre 2006 pension in payment there is to be added 25% of the amount crystallised at the deemed BCE.

HMRC had initially indicated the addition would be the actual amount of tax free cash paid prior to April 2006 but in amending regulations on 14th March 2024 they adopted a different approach to what was previously indicated."

HappyHarry

If this was the husband's only crystallisation event, then there may have been a time when more tax-free cash could have been taken since 2014. It would have depended on the value of 25 times his pension in payment at that point and the lifetime allowance at that time.

e.g. the Lifetime Allowance (LTA) was £1m in 2017/2018. If your husband's DB income that year was £39,000 then he could have crystallised some of his SIPP and taken some tax-free cash, though not much. In this example £975000 of his LTA of £1m would have been used by his DB pension, leaving £25,000 to use of which 25% could have been drawn as tax-free cash - £6,250.

squirrelpie

AllPaws4 said:

We have no reason to doubt this although it is annoying but it does raise a question as to whether our financial adviser should have spotted the potential issue earlier. 

Given we were receiving financial advice since 2014 was there ever a point when he should have been advised he could lose the option as the pension regimes changed from 2006 onwards?
I recognise that the lifetime allowance was variously £1.5m to £1.8m so the payments were probably well within those figures but as it came down should his pension in payment have been tested ? 

It seems to me the OP is asking questions about the I?FA's possible liability, and I don't think anybody has addressed that. I think we probably would need to know more about the type of FA and the arrangement you had or have with them?

Grumpy_chap

AllPaws4 said:

My husband took his final salary pension in 2001 at age 50 as part of his redundancy with no penalty. 

He paid into a SIPP until age 63 when he retired. The Sipp was left untouched until now as he turns 75 this year. 

Are you saying that from the age of 50, your husband initially took a £50k TFLS and was then receiving his final salary pension as well as working until the age of 63?
Was any part of the monthly income from the final salary pension taking advantage of any further tax free components (not personal allowance)?

AllPaws4

He took the maximum 25% TFLS in 2001 and no further tax free cash. The DB pension is still in payment. 
Yes, I think we will want to explore whether the IFA should have been testing the DB pension against the changing rules. I don’t know whether there was any transition period when these changes were introduced or it was an immediate change that wouldn’t have allowed the IFA to advise anything different. 

zagfles

There would definitely have been a time when he could have taken tax free cash from a SIPP, in fact AIUI he'd have only needed to take a token amount from the SIPP at a time when the LTA was well in excess of 25x his current pension, and that would have created a BCE so he'd then have a portion of the LTA still available. 

For instance if his pension in 2011 was £40k, and at that point he'd crystallised a small part of the SIPP, say £10k (with 2.5k TFLS), that would have created a BCE, with available LTA following it of £1.8M - 25x40k - 10k = 790k, ie around 44% of the LTA remaining. So he'd now have over £100k remaining of the lump sum allowance.  

Of course the reduction in the LTA in 2012 wasn't expected, but after the first reduction it looked obvious that the LTA was an easy target and at the very least would be frozen, so an IFA aware of this pension could have pointed out that the pre-commencement pension in payment which presumably increases with inflation in the context of a reducing/frozen LTA could end up using more and more of the LTA, possibly all of it, and it might have been worth doing a token crystallisation to cement in a remaining LTA %. 

See these links:
Lifetime allowance guidance newsletter: February 2024 - GOV.UK
[ARCHIVED CONTENT] PTM088300 - The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: pensions in payment on 6 April 2006 - HMRC internal manual - GOV.UK

ppp123

In broad terms, yes — there were points post-2006 where a small or “token” crystallisation of the SIPP could have locked in some remaining LTA while the allowance was still relatively high. That option reduced over time as the LTA fell and the DB pension in payment was re-tested using the 25× factor.

Whether an adviser should have flagged this depends on the scope of advice and whether the DB pension and LTA position were explicitly under review, but it’s fair to say the risk became clearer once the LTA started reducing rather than just being frozen.

It may be worth asking the adviser what LTA modelling, if any, was done over the years — that should help clarify whether this was an unforeseeable outcome or a missed planning opportunity.

DRS1

ppp123 said:

In broad terms, yes — there were points post-2006 where a small or “token” crystallisation of the SIPP could have locked in some remaining LTA while the allowance was still relatively high. That option reduced over time as the LTA fell and the DB pension in payment was re-tested using the 25× factor.

Whether an adviser should have flagged this depends on the scope of advice and whether the DB pension and LTA position were explicitly under review, but it’s fair to say the risk became clearer once the LTA started reducing rather than just being frozen.

It may be worth asking the adviser what LTA modelling, if any, was done over the years — that should help clarify whether this was an unforeseeable outcome or a missed planning opportunity.

Would the OP's husband have been a candidate for applying for any of the various protections from the reducing LTA?

It looks like he stopped contributing to the SIPP in 2014 which may or may not be relevant.  And they first consulted the adviser in 2014.  Perhaps this was a question they asked the adviser?