Since the abolition of the Lifetime Allowance (LTA) on 6 April 2024, advisers and paraplanners have been grappling with the new Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA) regime. This third of four articles from Quilter, Tim Grainger – retirement specialist looks at nine scenarios worth reviewing.
One of the more complex areas has been determining how much tax-free entitlement remains available for clients who crystallised benefits before 6 April 2024.
In some cases, the standard transitional calculation may not accurately reflect the amount of tax-free cash a client actually received, potentially leaving them with less allowance than they should have.
This is where a Transitional Tax-Free Amount Certificate (TTFAC) may help.
What is a TTFAC?
A TTFAC allows an individual to evidence the actual tax-free lump sums they received before 6 April 2024.
Without a certificate, providers generally rely on the standard transitional calculation, which broadly assumes that 25% of the Lifetime Allowance used represented tax-free cash.
While this works for many clients, it can produce an unfair result where benefits were taken in a different way.
A TTFAC can therefore be used to establish how much of an individual’s LSA and LSDBDA has genuinely been used, potentially preserving additional tax-free benefits for the future.
However, applying is not always beneficial and a comparison should be carried out before proceeding.
Nine scenarios worth investigating
Although there is no definitive list of clients who should apply for a certificate, the following scenarios should prompt further investigation.
1. Crystallisations when the LTA was below £1,073,100
Clients who crystallised benefits when the standard LTA, at that time, was less than £1,073,100 may benefit from a certificate, particularly if they do not hold any form of LTA protection.
2. Clients aged over 75 who took tax-free cash
Age-75 lifetime allowance tests are largely disregarded under the transitional rules. However, where tax-free cash was taken after age 75 but before 6 April 2024 the automatic age 75 disregard doesn’t apply. In such a situation a TTFAC could be a valuable way to reinstate valuation tax free lump sum rights.
3. Defined benefit scheme increases
Certain scheme pension increases created benefit crystallisation events that used LTA without generating any tax-free cash. As a result, the standard calculation may overstate allowance usage.
4. Crystallisations where no tax-free cash was taken
Some clients entered drawdown, purchased an annuity or started a scheme pension without taking any pension commencement lump sum. In these circumstances, the standard calculation may assume tax-free cash was taken when it was not.
5. Less than 25% tax-free cash taken
A number of older occupational arrangements provided less than the maximum available tax-free cash. Where this occurred, the standard calculation may overestimate how much allowance has been used.
6. Disqualifying pension credits
Disqualifying pension credits could not normally generate tax-free cash but still consumed LTA. A certificate may therefore preserve additional allowance.
7. Historic QROPS transfers
Before 6 April 2024, a transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) was a benefit crystallisation event. These transfers consumed LTA but may not have involved any tax-free cash, creating a potential mismatch under the standard calculation.
8. Clients who exhausted their LTA
Where a client used 100% of their LTA but still retains uncrystallised funds, a TTFAC could potentially preserve additional LSDBA. This may be particularly relevant when considering future death benefit planning.
9. Serious ill-health lump sums
Serious ill-health lump sums can create unusual outcomes under the new regime. Where these form part of a client’s crystallisation history, a review is likely to be worthwhile.
Why a certificate is not always the answer
One of the biggest traps is assuming that every client who took less tax-free cash than the standard calculation should apply for a TTFAC.
In reality, some clients will be better off under the standard transitional calculation.
This is particularly relevant where benefits were crystallised when the LTA was significantly higher than the current benchmark of £1,073,100. Under the standard calculation, historic LTA usage benefits from the transitional methodology. By contrast, a TTFAC focuses on the actual tax-free cash received and does not include any similar adjustment.
As a result, a certificate can occasionally leave a client worse off.
Practical considerations for paraplanners
Before recommending a certificate, paraplanners should ensure they have gathered sufficient information to assess both approaches.
Key areas to review include:
- All historic crystallisation events.
- Evidence of tax-free cash actually taken.
- Any LTA protections held by the client.
- Previous transfers to QROPS.
- Serious ill-health lump sums.
- Crystallisations involving pension credits.
- Any benefit events that occurred after age 75.
Obtaining historic paperwork can often be the most challenging part of the exercise, particularly where benefits were taken many years ago.
The bottom line
A TTFAC can be a valuable planning tool where the standard transitional calculation does not accurately reflect a client’s benefit history. In some cases, it may preserve additional tax-free cash or death benefit allowances that would otherwise be lost.
However, it is not a universal solution. The real value lies in identifying the right clients and carrying out a detailed comparison before a decision is made.
The opportunity to apply for a TTFAC is not open-ended. A client will lose the ability to obtain one once they have had a relevant benefit crystallisation event after 5 April 2024.
For existing clients, this means any potential TTFAC review should be completed promptly if it has not already been done. For new clients, it should be considered early in the advice process, before any further crystallisation takes place.
Given that the certificate becomes binding once issued, paraplanners should ensure a full review has been completed before an application is submitted.
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