Transitional Tax-Free Amount Certificate (TTAFC)

Following the lifetime allowance abolishment, the legislation has started to become more transparent around this change. There is one key area which you could potentially benefit from due to the transitional rules, and that is higher levels of tax-free cash, if you accessed benefits prior to April 2024.

Changes

The lifetime allowance was previously the amount you could accrue in your pension without incurring an additional tax charge. This was most recently set at £1,073,100 and you were typically entitled to 25% tax free cash or £268,275 unless you had lifetime allowance protection in place.

This allowance has now been replaced by three allowances:

• lump sum allowance which is capped at £268,275 for those without lifetime allowance protection or typically 25% of fund value if less than £1,073,100
• lump sum death benefit allowance - £1,073,100 for those without lifetime allowance protection
• overseas transfer allowance capped at £1,073,100.

This article focuses on the transitional rules specifically around the lump sum allowance and how you could potentially benefit.

Based on the old rules, tax free cash (now lump sum allowance) was typically worked out at:

• 25% x pension value = tax free cash amount (capped at lifetime allowance).

If you have partially accessed your benefits prior to 6 April 2024, your lump sum allowance will be reduced by the portion of lifetime allowance you previously used. For example, if you had used 40% of your lifetime allowance in previous years, you would have 60% of your allowance remaining and the lump sum allowance will now be worked out as follows:

• previous LTA used: £1,073,100 x 40% = £429,240 (standard tax-free cash entitlement £107,310)
• new maximum LSA remaining: £268,275 - £107,310 = £160,965.

There may however be instances where you could benefit from an increased tax-free lump sum, and this can be secured by applying for a TTFAC before your next crystallisation event. This should be assessed on a case-by-case basis and will not be relevant or advantageous to everyone.

Unfortunately, the situations where this could benefit a client are not completely clear however, instances where it may be relevant are, if before 6 April 2024:

• you accessed benefits when the lifetime allowance was lower than £1,073,100
• you took less than 25% tax free cash • you have accessed defined benefit pension which increases in payment or didn’t pay out tax free cash
• no tax-free cash taken when the lifetime allowance was used
• you are over 75, a benefit crystallisation event was previously automatically triggered at 75.

There are some instances when even if 100% of the lifetime allowance has been previously used, there could be an impact on the lump sum and death benefit allowance.

Please note this does not encompass all circumstances where this could apply, as typically a financial plan and retirement provision is unique to the individual and therefore, a complete list has not been established.

Example

Claire has had a crystallisation event in the past where she utilised 35% of the lifetime allowance when it was set at £1,000,000.

Based on the standard calculation Claire’s position is as follows on the basis 35% of the lifetime allowance being used:

• £1,073,100 x 35% x 25% = £93,896.25
• current lump sum allowance is £268,275 - £93,896.25 = £174,378.75 lump sum allowance remaining.

Using the TTFAC calculation however: • tax free cash previously received i.e. 25% of £350,000 = £87,500 • lump sum allowance £268,275 - £87,500 = £180,775 lump sum allowance remaining.

The TTFAC would confirm that Claire had received £87,500 of tax-free lump sum not £93,896.25 meaning she could access £6,396.25 more tax free than if she had not applied for the TTFAC.

How do you apply?

The certificate can only be applied for after 6 April 2024 and before the next relevant crystallisation event. The onus is on the pension member to provide the evidence needed to the pension scheme administrator before they will produce the certificate, and albeit the term ‘complete evidence’ as used in legislation and the process of and how you can apply for this, is likely to vary between schemes.

Next steps

This is an area where we strongly encourage people to seek advice. If the TTFAC is applied for and it shows a lower lump sum allowance it will supersede the standard calculation and cannot be reversed. It is not immediately clear who this could apply to or who will benefit from the TTFAC and it is likely to create some confusion.

It is clear that in an ever-changing world of legislation, financial planning advice is becoming more critical to a family’s long term financial plan. Your retirement provision is meant to be an asset you hold over the longer term, but it is an area in which legislation is changed regularly which creates complexity within retirement planning. For those who would like clarity on this or for those approaching retirement in the next 10 years, do not hesitate to contact us to help secure your retirement planning today.

Disclaimers

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. The Financial Conduct Authority does not regulate tax planning.