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Uncrystallised fund pension lump sum, drawdown, scheme specific tax-free cash and the strange case of the permissive statutory override - case study
Please note:
- The lifetime allowance charge has been removed from 6 April 2023 and the lifetime allowance will be removed completely from 6 April 2024.
- From 6 April 2024 tax-free cash will be restricted to £268,275, unless an individual has tax-free cash protection.
Jim and Andy were co-owners of a company which they have just sold at the very end of the tax year. They have a fully insured small self-administered scheme (SSAS). Jim is 65 years old and has a £1,200,000 fund with a scheme specific tax-free cash entitlement of £660,000. Andy is 55 years old and has a fund of £120,000 and is entitled to 25% tax-free cash. Jim is intending on retiring. Andy is looking to start a new business; he has a significant amount of money from the sale of the business but needs some funds to support himself whilst his new company starts. Neither of them has any lifetime allowance protection.
What are the options?
Jim’s protected tax-free cash entitlement is £660,000 and he wants to keep this. He could take his benefits from the SSAS but it doesn’t offer drawdown. He doesn’t want to buy an annuity as he wants to pass on any unused pension to his children.
One option would be to block transfer from the SSAS with Andy to a personal pension that allows drawdown. This would protect the scheme specific tax-free cash and give him the option to leave his remaining benefits invested within a pension wrapper. He would have to take the full amount of scheme specific tax-free cash at the same time. If he phased benefits, he would revert to a maximum 25% tax-free cash.
Andy needs his cash quite urgently and doesn’t really want to go through and pay for the advice process to transfer to a new arrangement only to take the whole fund as an uncrystallised fund pension lump sum. He’s not concerned that the money purchase annual allowance will apply to him as he intends on using the sale of his new business to fund his retirement. Nor does he have scheme specific tax-free cash protection which would be lost if he takes his benefits as an uncrystallised fund pension lump sum.
As they are the only members and the trustees of the SSAS they can decide to make use of the permissive statutory override that was brought in from April 2015. This allows the trustees to offer pension flexibility without updating the scheme rules.
Taking the benefits
Andy
As the SSAS can now offer flexible benefits Andy can be paid an uncrystallised fund pension lump sum immediately. He will get £30,000 tax-free cash and the remaining £90,000 will be taxed at emergency rate. He’s got no other income in this tax year. Emergency rate tax is applied irrespective of where you live in the UK.
Under the emergency tax code, the amount being withdrawn is treated as if it will continue to be paid each month. Although in many cases it will actually be a one-off payment – known as the 'Month 1' basis.
The provider will therefore apply 1/12th of the personal allowance to the payment and will assess the remaining payment against 1/12th of each of the income tax bands currently in force.
| Annual tax band | Month 1 | Tax rate | Tax due | |
| Personal allowance | £12,570.00 | £1,047.50 | 0% | £0.00 |
| Basic rate band | £37,700.00 | £3,141.67 | 20% | £628.33 |
| Higher rate band | £37,700 - £125,140 | £7,286.67 | 40% | £2,914.67 |
| Additional rate band | Over £125,140 | £78,524.16 | 45% | £35,335.87 |
| (£90,000.00) | Total tax due | £38,878.87 | ||
| TFC | £30,000.00 | |||
| Net received | £81,121.13 |
Assuming he has no other earnings in the tax year the actual tax due would be as follows (the figures assume Andy is not a Scottish rate taxpayer).
| Annual tax band | Amount in band | Tax rate | Tax due | |
| Personal allowance | £12,570.00 | £12,570.00 | 0% | £0.00 |
| Basic rate band | £37,700.00 | £37,700.00 | 20% | £7,540.00 |
| Higher rate band | £37,700 - £77,430 | £39,730.00 | 40% | £15,892.00 |
| (£90,000.00) | Total tax due | £23,432.00 | ||
| TFC | £30,000.00 | |||
| Net received | £96,568.00 |
The amount of overpaid tax is £15,446.87.
He will be able to claim back the overpaid tax from HMRC. You can find out how to do this in our emergency rate tax article.
Jim
Jim needs to take his full scheme specific tax-free cash in one go otherwise the tax-free cash will reduce to 25%. Using the permissive statutory override, he can then transfer his remaining funds to a drawdown provider as a transfer in drawdown.
As his fund is £1,200,000 and is over the current lifetime allowance of £1,073,100, his adviser has checked to see whether he can apply for either fixed or individual protection 2016.
- Jim’s fund value on 5 April 2016 was £1,128,000.
- He has scheme specific protected tax-free cash of £660,000.
- No further contributions have been paid to the plan since 5 April 2016.
- He has no other pension savings/accrual.
Jim can still apply for individual protection 2016, which gives him a personal lifetime allowance of £1,128,000. He will get the full tax-free cash entitlement of £660,000. He will need to pay income tax at his marginal rate on the excess over the lifetime allowance of £1,200,000 - £1,128,000 = £72,000.
If he had applied for fixed protection 2016 before 15 March 2023 this would have given him a personal lifetime allowance of £1,250,000. He would still be entitled to £660,000 tax-free cash but there would have been no income tax on the excess over the lifetime allowance.
Jim can choose to wait until after 6 April 2024 when the lifetime allowance is being abolished. However, if he decides not to take all his benefits at the same time, he will lose his scheme specific tax-free cash protection.
Further information
- Emergency tax and lump sum withdrawals
- HMRC Pensions Tax Manual - PTM063300: Member benefits: lump sums: uncrystallised funds pension lump sum (UFPLS)
- Fixed protection
- HMRC Pensions Tax Manual - PTM093210: Protection from the lifetime allowance charge: fixed protection, fixed protection 2014 and fixed protection 2016: applying for fixed protection 2016 (FP 2016)
- Individual protection
- HMRC Pensions Tax Manual - PTM094210: Protection from the lifetime allowance charge: individual protections 2014 and 2016: applying for individual protection 2016 (IP 2016)
- Protection of scheme specific tax-free lump sum
- HMRC Pensions Tax Manual - PTM063130: Member benefits: lump sums: protection of pre-6 April 2006 lump sum rights: scheme-specific lump sum protection - overview
- Pensions Tax Manual - PTM080000: The lifetime allowance and the lifetime allowance charge: contents
Disclaimer
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.