- The order of taking tax-free cash from multiple schemes is important
- Knowledge in this area shows the value of your advice
Key takeaways from this article
Where the client holds uncrystallised rights in multiple schemes, the order of crystallisation is very important for maximising tax-free cash for clients where at least one of the schemes has SSPTFC. Knowledge in this area shows the value of your advice.
1. How SSPTFC works with the tax-free allowances
Unlike a standard pension commencement lump sum (PCLS), a scheme specific protected lump sum is not limited by reference to the client’s remaining Individual’s Lump Sum Allowance (ILSA), but it is limited by remaining Individual’s Lump Sum and Death Benefit Allowance (ILSDBA).
The permitted maximum for a PCLS (the limit on how much is tax-free) is the scheme specific protected amount up to the remaining ILSDBA. Therefore, if there is more than one pension scheme, which scheme you take tax-free cash from first can effect the total amount of tax-free cash you can take across all pensions. This is because, the act of taking SSPTFC uses up both ILSA and ILSDBA.
ILSA is reduced by 25% of the total fund being used to provide a SSPTFC and connected pension (so the full uncrystallised fund value). ILSDBA will be reduced by the total tax-free amount.
2. Taking benefits from multiple schemes
Where there are multiple schemes and you will exceed your ILSA, the order you take benefits will affect the total amount of tax-free cash you can take. As long as there is some available ILSA and sufficient remaining ILSDBA after taking TFC from other schemes you should take your SSPTFC last to maximise the amount you can take tax-free. This can be demonstrated in the below example.
Example
Client has two schemes A and B -
- Scheme A - worth £600k with SSPTFC of 300k as per the formula
- Scheme B – worth £750k with no PTFC
|
Standard permitted maximum |
SSPTFC permitted maximum |
|
The lower of:
|
The scheme specific protected amount as per the formula ( as long as the member has some available ILSA and sufficient remaining ILSDBA). |
As you can see from this example, the order that TFC is taken, can make a material difference to the total TFC. Therefore you can show your value your clients by maximising the amount of tax-free cash they can take by choosing the correct order.
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The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.