Despite it being well over a year since the lifetime allowance was abolished, questions around the need for, and complexities surrounding, transitional tax-free amount certificates (TTFAC), persist, says Andrew Tully, Technical Services Director. Getting the timing and calculations right, is crucial, he emphasises.
When the lifetime allowance (LTA) was abolished, the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) were introduced to limit the amount that can be taken as a tax-free lump sum during lifetime or following death before age 75.
Any benefits paid before 6 April 2024 need to be taken into account when working out the LSA and LSDBA. The standard method to do this means the LSA and LSDBA are reduced by 25% of the individual’s previously used LTA, although special rules apply where a serious ill-health lump sum was paid before 6 April 2024.
However, people can ask that the monetary value of the tax-free amounts they received is used instead of automatically deducting 25% of the individual’s previously used LTA.
People can only apply for a TTFAC if no relevant benefit crystallisation event has taken place after 6 April 2024, so for some clients it may be too late. In simple terms, if the individual has received a lump sum since April 2024, they can’t apply. But, for others, the option of a TTFAC is still available – and that includes those who have only taken taxable income since April 2024.
To obtain a TTFAC an individual, or a personal representative, can apply to a registered pension scheme where the individual is a member or, if the individual is deceased, of which the individual was a member immediately before death. They will need to provide complete evidence of any lump sums paid by schemes in respect of the member.
A TTFAC can be useful in a number of situations. One of the most common is where the client previously took benefits from a defined benefit scheme which paid less than 25% PCLS due to scheme commutation factors. In other situations, clients may have opted to take no lump sum from a particular scheme.
The timing of when benefits were taken may result in some individuals being able to benefit from a TTFAC. This is because the standard calculation doesn’t take into account the lower lifetime allowance that was in place between April 2016 and April 2020. So even if a client took 25% PCLS during this period, a TTFAC may mean the LSA and LSDBA are increased.
And where 100% of the LTA has been used, the standard calculation results in no LSA or LSDBA remaining. In some cases, applying for a TTFAC may be of benefit and mean some LSA or LSDBA is available for future use.
However, the way the legislation is written means a TTFAC can give a worse outcome than the standard calculation. HMRC have said that once a client receives a certificate, it is irreversible, and people must use it even if it is a poorer outcome. Therefore, care needs to be taken before making a request.
If a client applies for a TTFAC, the scheme administrator will use the evidence submitted to determine the client’s transitional lump sum tax-free amount and transitional lump sum and death benefit tax-free amount and issue a certificate. Or it can decline the application if there is insufficient evidence.
The scheme administrator has three months from the date of the application to review the evidence and provide a response. It’s worth being aware a certificate shows the revised amounts used, not the amounts remaining to be used. So, for example, both figures could be £0 and that means the full LSA and LSDBA are available for the member to use in future.
If an individual receives a certificate, they have 90 days to send a copy to all their pension providers, such as SIPP’s, PP’s, Stakeholder, auto-enrolled workplace schemes as well as Defined Benefit and Defined Contribution Occupational pension schemes. The individual must also notify them all if the certificate is cancelled.
TTFACs are a complex part of the new legislative landscape but can be particularly important in allowing some clients to receive PCLS in future or allow lump sum death benefits to be paid tax-free, or partially tax-free.
