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Transitional Tax-Free Amount Certificates

19/02/2024

On 6 April 2024, the lifetime allowance will be fully abolished. At this point, the amount of tax-free benefits that can be paid from a pension will be limited to the new ‘lump sum allowance’ and ‘lump sum and death benefit allowance’.

For individuals who have already taken benefits from a pension, it will be assumed that they previously took 25% of those funds as tax-free cash. As a result, their new allowances will be reduced by 25% of their lifetime allowance used as at 5 April 2024. For example, if an individual has used 10% of their lifetime allowance, their ‘lump sum allowance’ and ‘lump sum and death benefit allowance’ will be reduced by:

25% of (10% of £1,073,100*) = £26,827.00

* Based on an individual who does not hold transitional protection and is subject to the standard lifetime allowance of £1,073,100.

If an individual has used 100% of their lifetime allowance by 5 April 2024, their ‘lump sum allowance’ and ‘lump sum and death benefit allowance’ will automatically be reduced to £0.00. In this scenario, the assumption is that all benefits were effectively taken tax free.

Transitional Tax-Free Amount Certificates (TTFAC)

For some individuals, their total tax-free benefits taken before 6 April 2024 will be less than the standard calculation suggests. For these people, it will be possible to obtain a ‘Transitional Tax-Free Amount Certificate’ (TTFAC) and have their allowances increased accordingly.

A TTFAC will ensure that an individual’s new allowances are only reduced by the tax-free amounts that they took before 6 April 2024. This may be beneficial to those who:

  • Took less than 25% tax free cash when previously crystallising benefits - often those in a defined benefit scheme or with other safeguarded benefits.
  • Took benefits when the Lifetime Allowance (LTA) was less than £1,073,100 (between 6 April 2016 – 5 April 2020) – As the standard calculation is based on the current LTA of £1,073,100, it will slightly overestimate the amount of tax-free cash they took.
  • Have no lifetime allowance remaining on 5 April 2024 – although these individuals will often have taken at least £268,275 in tax free cash (meaning that they can’t regain any lump sum allowance), they are unlikely to have received as much as £1,073,100 tax free (meaning that they can regain some lump sum and death benefit allowance).
  • Are over age 75 and still have tax free cash remaining – these individuals would have automatically had their pension rights tested against the lifetime allowance on their 75th birthday (under BCE5, BCE5A or BCE5B). These age 75 crystallisation events will use up a portion of their new allowances under the transitional calculation, even though no tax-free cash has been paid.
  • Have transferred overseas to a qualifying recognised overseas pension scheme (QROPS) under the age of 75 – The benefits transferred would have automatically crystallised under BCE8 at the point of transfer.
  • Have benefits in payment from before 6 April 2006 – These benefits are notionally tested against the lifetime allowance at the point of the members first benefit crystallisation event (BCE), valuing them at 25x the pension in payment at that time. Where a BCE has occurred between 6 April 2006 and 5 April 2024, it will be possible to obtain a TTFAC, potentially increasing their allowances.*

* Any tax-free cash paid prior to 6 April 2006 is not classed as a ‘pension commencement lump sum’ (PCLS) or the tax-free element of a ‘uncrystallised funds pension lump sum’ (UFPLS), so would not currently use up any of the new allowances once a TTFAC is obtained. However, HMRC have confirmed that they will bring forward legislation to ensure pre-6 April 2006 tax free benefits will be accounted for in the TTFAC application process.

Applying for a Transitional Tax-Free Amount Certificate (TTFAC)

To successfully apply and obtain a TTFAC, some requirements must be met:

  • The application can only be made by the individual (or if deceased, the individual’s personal representatives).
  • The application can only be made to a scheme of which the individual is a member - HMRC have clarified that they would normally expect an application to be made to the scheme from which the first lump sum is to be paid after 5 April 2024. 
  • The certificate must be obtained before the first relevant benefit crystallisation event (RBCE) occurs after 5 April 2024 - Once someone takes a tax-free lump sum after this time, their ability to gain a TTFAC is lost.
  • The application must include ‘complete evidence’ of the total amount of tax-free sums received between 6 April 2006 and 5 April 2024. This will include all tax-free sums paid from any scheme during this period.
  • The scheme will then have a 3-month period to either issue the certificate or explain why the application has been refused. 

The format of the application and resulting certificate

HMRC have not yet issued detailed guidance on the format for a TTFAC application or what would constitute ‘complete evidence’ of the previous tax-free amounts paid. It is also not completely clear on what grounds an application can be refused. The scheme administrator will therefore need to make an informed decision on whether the information provided by a member is sufficient to issue a certificate.

The certificate itself can be in such form as the scheme administrator determines. It can also be incorporated into any other document that is given to the applicant by the scheme. However, it will always need to contain:

  • the individual’s name, address, and national insurance number.
  • the individual’s lifetime allowance previously used amount (expressed as a percentage of the standard lifetime allowance).
  • Confirmation of the amount that the scheme administrator has determined is the individual’s lump sum transitional tax-free amount.
  • Confirmation of the amount that the scheme administrator has determined is the individual’s lump sum and death benefit transitional tax-free amount.  

Comment

Most people are unlikely to benefit from a TTFAC and will be happy to go through the standard transitional calculation. In fact, for those who crystallised benefits when the lifetime allowance was above £1,073,100, they will normally be better off without a TTFAC.

Individuals therefore need to be careful before applying, since once the TTFAC is obtained, it cannot be cancelled and will replace the transitional calculation going forward. We understand that this will be the position even where it results in lower allowances.

For those who could benefit from a TTFAC, they may wish to start gathering evidence of the tax-free cash taken at past crystallisations now. This is because, from 6 April 2024, they will need to obtain a TTFAC before they take any further tax-free cash, which might take some time to do.

Note that the information above is based on our understanding of the draft legislation as it currently stands, which is still potentially subject to change.

Important Information

Please note this is for general information only and is based on LV=’s understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.