Transitional Tax-Free Certificates – Do your clients still require one?

New regulations made in November 2024, backdated to April 2024, addressed errors in the Finance Act 2024 concerning the abolition of the Lifetime Allowance. Also introduced were changes to the Lifetime Allowance calculations for clients who reached age 75 prior to 6 April 2024. These changes may reduce the need for these clients to apply for a Transitional Tax-Free Amount Certificate (TTFAC). This will not always be the case though and in some cases a TTFAC will not help restore any tax-free cash rights lost when the Lifetime Allowance was abolished.

Background

As part of the government’s pension reforms removing the Lifetime Allowance and introducing the Lump Sum Allowance and Lump Sum Death Benefit Allowance, a method was required to adjust the new allowances for any benefits taken prior to 6 April 2024.

Rather than replicate the pre-6 April 2024 rules, more complex arrangements were introduced allowing many individuals to choose between:

• The ‘default’ basis: which considers Lifetime Allowance usage at 5 April 2024, or
• An alternative basis: that largely (although not completely) ignored previous Lifetime Allowance usage and instead is based primarily on the amounts of tax-free lump sums received. Certain conditions must be met to be eligible for this basis and it requires an application by the member to one of their pension providers for a TTFAC.

Problems with the default basis

For many individuals, the default basis replicates the old rules for calculating tax-free benefits. However, certain groups of clients may be disadvantaged under this approach. One such group includes those who reached age 75 before 6 April 2024.

To address their situation, new regulations introduced in November 2024 removed Benefit Crystallisation Events (BCEs) triggered by turning age 75 from the calculation of previously used amounts. However, this adjustment is conditional: the client must not have received a tax-free payment from a pension scheme between age 75 and 5 April 2024. If they did receive a lump sum payment during this period, the age 75 BCEs will still be included in the calculation.

For clients in this scenario, the only way to recover lost tax-free allowances is by applying for a TTFAC. However, eligibility to apply for a TTFAC is lost if the client has already taken any tax-free lump sums after 6 April 2024.

Example:

Consider a client with an uncrystallised pension fund of £1 million who turned 75 on 1 January 2024. At that time, they could have taken £250,000 as a tax-free lump sum but chose not to. Instead, they withdrew £5,000 as an Uncrystallised Funds Pension Lump Sum (UFPLS) on 1 April 2024.

When the new rules came into effect on 6 April 2024, their maximum tax-free payment under the default basis was reduced to £17,025, representing a loss of £232,975 in potential tax-free benefits—even though they had only received £1,250 as a tax-free amount prior to the rule change.

In this scenario, the new rules introduced in November 2024 do not help the client because the UFPLS payment prior to 6 April 2024 prevents the age 75 BCEs from being disregarded. They can recover the “lost” tax-free allowance by applying for a TTFAC, but the application for a TTFAC must be submitted prior to taking any tax-free payments after 5 April 2024, otherwise they will not be eligible to apply and the “lost” Lump Sum Allowance cannot be recovered.

Problems with the TTFAC basis

Although TTFACs can help clients aged over 75 recover tax-free allowances lost under the default basis, they are not always beneficial. In some cases, using a TTFAC could have a detrimental effect -particularly for clients who crystallised benefits when the Lifetime Allowance (LTA) exceeded £1,073,100.

Example:

Consider a client who crystallised £1.2 million in 2011, when the LTA was higher, and received a tax-free payment of £300,000. The client reaches age 75 on 1 January 2020 with a drawdown fund of £1.2 million and uncrystallised funds of £350,000. At that point – and up until 5 April 2024 – they could still receive a further tax-free payment of £87,500. However, between April 2024 and November 2024, this amount would have been reduced to zero under the new rules.

Under these circumstances a TTFAC will not recover the lost tax-free lump sum because their original tax-free payment (£300,000) exceeds the Lump Sum Allowance of £268,275.

In this scenario, the client’s lost allowances will be recovered by the new regulations introduced in November 2024, – but only if they did not receive a tax-free lump sum payment between turning age 75 and 5 April 2024.

Where a TTFAC can be beneficial

Some common situations where a TTFAC may provide for higher tax-free allowances are where:

• BCEs have arisen without any tax-free lump sum payments to the client.

• Pension benefits have been taken by the client and the tax-free lump sum is lower than 25% – although this may not be the case if the Lifetime Allowance was greater than £1,073,100 when the benefits were crystallised.

• Pension benefits were taken when the Lifetime Allowance was lower than £1,073,100.

• Clients had used 100% of their Lifetime Allowance as at 5 April 2024. Whilst the certificate may not allow for any additional tax-free lump sum payments to the client, it can lead to a higher Lump Sum and Death Benefit Allowance.

Points to remember when applying for a TTFAC

Applications must be made before the first relevant benefit crystallisation from 6 April 2024 and must be submitted with complete evidence of all of the previous BCEs. For more information, please refer to our guide on Transact Online and our calculator for comparing the allowances available under each approach. You can also download an application form for your clients to complete. As always, if you need more help, feel free to contact the Technical Services Department on 0207 608 5330 or e-mail technical_direct@integrafin.co.uk

All information is based on our understanding and interpretation of applicable law and regulation.

 

 

 

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