Understanding tax-free cash and the LSA
Up to 30 CPD minutes
Introduction
Tax-free cash is a valuable benefit of pension saving and so it’s vital that advisers understand how much tax-free cash will be available when benefits are taken. Following the introduction of the ‘lump sum allowance’ (LSA) on 6 April 2024, it’s also important to understand its impact and, in particular, how benefits taken before its introduction affect the amount of LSA available.
This module should take around 30 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 30 minutes CII/PFS accredited CPD certificate can be claimed.
This module should take around 30 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 30 minutes CII/PFS accredited CPD certificate can be claimed.
Outcomes
On completion of this module you should be able to:
- List situations where the amount of tax-free cash available may be different from the normal 25% entitlement
- State the standard LSA and the various levels of LSA for individuals with transitional protections
- Calculate the deduction from an individual’s LSA to account for benefits taken before 6 April 2024
- List situations where it could be beneficial to apply for a ‘transitional tax-free amount certificate’ (TTFAC)
- Explain the different methods that defined benefit schemes can use to provide tax-free cash
Learning material
This module looks at the situations where tax-free cash may differ from the normal 25%, the different ways that tax-free cash can be provided by defined benefit schemes and the potential impact of the lump sum allowance.
Please read the learning material before attempting the self-assessment questions.
CPD minutes: up to 30
Technical guide - Tax-free cash and the LSAOpens in new windowPlease read the learning material before attempting the self-assessment questions.
CPD minutes: up to 30
Post learning assessment
Question 1
There are several situations that could result in an individual receiving less than 25% tax free-cash - which of these is NOT one of them?
a. The individual has enhanced or primary protection with registered tax-free cash
b. The pension includes a disqualifying pension credit following divorce
c. The individual has scheme-specific tax-free cash protection
d. The individual has a significant GMP entitlement under the scheme
a. The individual has enhanced or primary protection with registered tax-free cash
b. The pension includes a disqualifying pension credit following divorce
c. The individual has scheme-specific tax-free cash protection
d. The individual has a significant GMP entitlement under the scheme
Question 2
For defined benefit schemes and tax-free cash, which of the following statements is FALSE?
a. Most private sector schemes provide tax-free cash by giving up part of the pension (commutation)
b. Some schemes provide a separate lump sum based on an accrual rate (e.g. 3/80ths) and length of service
c. Some schemes which provide a separate lump sum also allow some pension to be commuted to allow additional tax-free cash, up to the overall 25% maximum
d. Maximum tax-free cash is based on the total crystallised value, excluding any GMP
a. Most private sector schemes provide tax-free cash by giving up part of the pension (commutation)
b. Some schemes provide a separate lump sum based on an accrual rate (e.g. 3/80ths) and length of service
c. Some schemes which provide a separate lump sum also allow some pension to be commuted to allow additional tax-free cash, up to the overall 25% maximum
d. Maximum tax-free cash is based on the total crystallised value, excluding any GMP
Question 3
Jade has a defined benefit pension where tax-free cash is provided by giving up some of the pension. Her accrued pension is £25,000 a year. If the commutation factor is 15:1, how much pension does Jade have to give up if she wants to take tax-free cash of £90,000?
a. £6,000 a year
b. 7,692 a year
c. £12,000 a year
d. £19,000 a year
a. £6,000 a year
b. 7,692 a year
c. £12,000 a year
d. £19,000 a year
Question 5
Which of the following would NOT be a potential reason to consider applying for a ‘transitional tax-free amount certificate’ where Daniel had taken one of his pensions before 6 April 2024?
a. The scheme included disqualifying pension credit rights b. He took 25% tax-free cash when the LTA was lower than £1,073,100
c. He took no tax-free cash due to attractive guaranteed annuity rates d. He received a stand-alone lump sum
a. The scheme included disqualifying pension credit rights b. He took 25% tax-free cash when the LTA was lower than £1,073,100
c. He took no tax-free cash due to attractive guaranteed annuity rates d. He received a stand-alone lump sum
Check your answers
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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.