Transitional Tax-Free Amount Certificates For The New Pension Allowances

Once the new pension rules take effect from 6 April 2024, every pension client will need to decide how they want any previously used Lifetime Allowance (LTA) to be accounted for in determining their new allowances.

The default option is that 25% of the LTA used as at 5 April 2024, will be offset against the new Lump Sum Allowance (LSA), which is £268,275 for most people, but will be 25% of any protected LTA that has been obtained or, in the case of enhanced protection or standalone lump sum protection, the maximum amount that could have been paid on 5 April 2023.

For example, if you had crystallised £1m when the standard LTA was £1.8m, and you have no LTA protection, you will have used 55.56% of your LTA which means that your remaining LSA will be £268,275 x (1 – 0.5556) = £119,221. This amount will also be set against the new Lump Sum and Death Benefit Allowance (LSDBA), unless a serious ill-health lump sum or an uncrystallised lump sum death benefit has been paid. In which case the LSDBA will be reduced by 100% of the LTA used. The LSDBA will be £1,073,100 for most, but will be the protected amount for those with fixed or individual protection, and the total amount of uncrystallised pension savings as at 5 April 2024 for those with enhanced protection.

The alternative option is for the adjustment to the allowances to be calculated using the actual amount of tax-free payments received by the client prior to 6 April 2024. Clients can obtain a transitional tax-free amount certificate from any scheme that holds benefits for them. The selected scheme must be provided with satisfactory evidence of all benefit crystallisation events and lump sum payments, with the scheme having to produce the certificate (or confirm why the certificate cannot be produced) within three months of it being requested by the client or their personal representatives. The certificates will contain the total amounts of LSA and LSDBA used for benefits taken prior to 6 April 2024.

For example, where clients have taken benefits from a final salary scheme as scheme pension only, if they apply for a transitional tax-free amount certificate, there will be no reduction to their LSA or LSDBA in relation to that crystallisation. Under the default approach the LSA and LSDBA would be reduced by 25% of the amount crystallised, even though no tax-free cash had been paid.

A critical issue to note is that, if a certificate is required, it must be obtained before the first relevant benefit crystallisation event (RBCE) occurs after 5 April 2024 – it cannot be obtained and applied retrospectively. Furthermore, if a certificate is obtained then the figures in it must be used, the client cannot decide to revert to the default option if this resulted in a higher allowance available.

For those who receive benefits from their pension using phased drawdown or regular uncrystallised funds pension lump sum (UFPLS) then, if a certificate is required, these payments must be halted to allow time for the certificate to be obtained. Given that this might take three months to obtain, clients might want to consider crystallising sufficient funds to cover this period, prior to 6 April 2024.

Please note that this is based on our current understanding of the new rules.

1. Introduction
2. TOL Recent Enhancements 
3. Structured Product Trends
4. Linking Third Party Offshore Bonds To A GIA
5. Transact Webinar Highlights From 6 February
6. Transact Data API
7. Transact – BlackRock MPS
8. Transitional Tax-Free Amount Certificates For The New Pension Allowances
9. Fund Changes
10. Interest on Cash
11. Transact Events 2024