The post-lifetime allowance regime has created new planning challenges for some pension clients. Joshua Croft, Senior Technical Consultant at AJ Bell, explains why advisers and paraplanners should review transitional tax-free amount certificate opportunities before a client takes their first post-April 2024 lump sum.
The abolition of the lifetime allowance introduced a new set of allowances and, for some clients, an important planning decision that can’t generally be revisited.
Before a client who took benefits before 6 April 2024 becomes entitled to their first relevant lump sum under the new regime, advisers and paraplanners should establish whether the standard transitional calculation produces the correct result for them, or whether they could benefit from a transitional tax-free amount certificate (TTFAC).
Once that lump sum has been paid, it is generally too late to apply.
How the standard transitional calculation works
Where a client used some of their lifetime allowance (LTA) before 6 April 2024, this will normally be recorded as a percentage. The standard transitional calculation treats 25% of the client’s LTA previously-used amount as having been taken tax free.
For example, if previous benefit crystallisation events used 80% of the client’s LTA, the standard calculation normally treats 80% of the standard lump sum allowance (LSA), equivalent to £214,620, as already used.
This is deducted from the standard LSA of £268,275, leaving £53,655 available. The standard LSA will differ if the client has valid protection from the LTA.
This provides a relatively straightforward transition between the old and new regimes, but it does not reflect what every client actually received. Some clients may have taken significantly less tax-free cash than the standard calculation assumes.
A TTFAC replaces the assumed amount with the actual tax-free lump sums received before 6 April 2024. Where the actual amount was lower, this can preserve more of the client’s LSA and LSDBA.
A costly missed opportunity
Consider a client who had already reached age 75 and used approximately 87% of their lifetime allowance across several pension arrangements.
The client had not taken any tax-free cash when those benefits were originally tested against the LTA. They subsequently crystallised £40,000 and received a £10,000 pension commencement lump sum (PCLS) before 6 April 2024 and still under the LTA regime.
After the new allowances were introduced, the client crystallised a further £80,000 and received £20,000 tax-free cash. As no TTFAC was in place, the standard transitional calculation applied.
This assumed that 25% of the client’s previous LTA usage had been received tax free, even though the actual amount was considerably lower.
The payment was within the LSA available under the default calculation and was therefore a valid PCLS, but it was the client’s first relevant benefit crystallisation event and closed the window for obtaining a TTFAC.
The client permanently lost the opportunity to replace the assumed figure with the lower amount of tax-free cash actually received.
The age-75 trap
This case also highlights an easily missed feature of the transitional rules.
Where a client reached 75 before 6 April 2024, amounts tested through BCE 5, 5A or 5B can sometimes be excluded when calculating their previous LTA usage.
However, this treatment only applies if the client did not become entitled to a lump sum between reaching 75 and 5 April 2024.
Because the client in this case took a £10,000 PCLS during that period, the age-75 BCEs could not be disregarded. This substantially increased the amount treated as having been taken tax free under the standard calculation.
Clients who reached 75 before 6 April 2024 therefore require particular care. Advisers need to establish not only what happened at age 75, but whether any lump sum was subsequently taken before the old regime ended.
Act before the first relevant lump sum
A TTFAC is not automatically beneficial. If a client received more tax-free cash than the standard calculation assumes, obtaining one could reduce their available allowances. Advisers should compare both outcomes before applying.
Where a certificate would be beneficial, the client must provide complete evidence accounting for all their previous LTA usage and tax-free lump sums.
HMRC says this may include BCE statements, financial records and bank statements. The certification administrator has three months to issue the certificate or refuse the application because the evidence is insufficient.
Most importantly, the certificate must be issued before the client becomes entitled to their first relevant lump sum after 5 April 2024.
Starting the investigation when the client asks to take tax-free cash may therefore be too late if historic evidence must be collected from several providers.
A sensible process is to identify affected clients in advance, particularly those with substantial previous LTA usage, age-75 tests, benefits taken without full tax-free cash, scheme-specific lump-sum rights or incomplete records.
Before submitting any PCLS or UFPLS instructions, advisers should record that the standard transitional calculation has been checked and that a TTFAC has either been obtained or deliberately ruled out.
Once tax-free cash has been paid, HMRC’s position is clear; returning or cancelling the payment does not reverse its tax consequences or restore the TTFAC opportunity.
This is one area where a relatively simple check before the transaction can prevent a permanent and potentially valuable loss of tax-free cash entitlement.
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