Following April’s lifetime allowance (LTA) abolition and uncertainty around whether it will be reintroduced, a common question from advisers is whether they should apply for all their clients to receive transitional tax-free amount certifications (TTFACs) to determine the amount of tax-free cash they can take from their pension.
Despite the uncertainty, planning is still needed, and it is critical that advisers approach TTFACs on a case-by-case basis. This is because proceeding down the TTFAC route is an irreversible procedure and won’t always put a client in a better position. In some cases, it might leave them worse off and could even amount to a violation of the Consumer Duty.
We explore what TTFACs are and who might benefit – as well as the circumstances in which they may not provide a benefit at all.
What’s changed?
With the abolition of the LTA, two new allowances have taken its place. These are the lump sum allowance (LSA), which has a default allowance of £268,275, and the lump sum and death benefit allowance (LSDBA), which has a default allowance of £1,073,100.
The initial level of the new allowances will be adjusted where an individual has used up some – or all – of their LTA prior to 6 April 2024. The default calculation will look at the amount of LTA used, and 25% of that will be deducted from both the LSA and LSDBA.
Introducing the TTFAC
The issue with this default is that it assumes 25% was taken as a tax-free lump sum every time benefits were crystallised prior to 6 April, which may not have been the case.
To address this, HMRC is allowing individuals to apply for a transitional tax-free amount certificate (TTFAC), potentially allowing 25% tax-free cash to be taken with future withdrawals where otherwise there would be no tax-free cash.
Despite the uncertainty, planning is still needed, and it is critical that advisers approach TTFACs on a case-by-case basis
Where someone can evidence that the tax-free lump sums they’ve taken before 6 April 2024 come to less than 25% of their amount of LTA used, they can present that to their pension scheme and ask them to produce a TTFAC. This certificate will confirm the individual’s available LSA and LSDBA for use in the future.
A TTFAC must be in place before the first relevant benefit crystallisation event (RBCE) occurs after 5 April 2024. An RBCE only happens when specific tax-free lump sums are taken and not where pensions are put into payment for income only. If an RBCE occurs before a TTFAC is granted, then the certification method cannot be used and the standard calculation will always apply.
Who will and won’t benefit?
Once a TTFAC is issued, it will always apply and cannot be revoked by the individual. And it won’t be right for every client, which is why assessing individual needs is so important.
For example, if an individual has always taken 25% as tax-free cash when they’ve vested a pension, and they didn’t crystallise anything when the LTA was lower than £1,073,100, then a TTFAC won’t give them a better allowance.
In fact, if they’d taken lump sums when the LTA was greater than £1,073,100, then it could put them in a worse position as the actual amounts of cash taken are larger than the equivalent percentage of £1,073,100. The standard calculation of 25% of the LTA used would be better in this circumstance.
It may benefit some, however. To help determine this, advisers will need to scrutinise each individual’s complete history. Typical situations that could be worth looking into more closely include where:
- benefits were vested without taking any lump sums;
- benefits vested during 2016/17 to 2019/20 when the LTA was lower than £1,073,100;
- funds were transferred to a qualifying recognised overseas pension scheme (QROPS) – LTA would have been used up, but no tax-free lump sums would have been paid at the time;
- a client reached age 75 before 6 April 2024 and LTA was used by the age 75 tests (i.e. no tax-free cash was taken).
Ultimately, the investigation is just a comparison between 25% of the amount of LTA the individual has used, versus the total of all their tax-free lump sums they’ve taken.
Once a TTFAC is issued, it will always apply and cannot be revoked by the individual. And it won’t be right for every client
Also bear in mind that it might be the case that while you can’t improve a clients’ LSA situation with a TTFAC, you may still be able to increase available LSDBA.
For example, if 100% of the LTA had been used as of 5 April 2024, the default position is that both the LSA and LSDBA are zero. A TTFAC might not give any additional LSA if the actual amounts of tax-free lump sums already taken are £268,275 or higher, but it could help the LSDBA.
So, if they’d only taken a pension commencement lump sum (PCLS) of £268,275, on successful application for a TTFAC, this amount is deducted from the LSDBA of £1,073,100 (assuming no protection). This would give them an available LSDBA of £804,825, and not zero as would have been the case using the standard calculation.
Looking ahead
The TTFAC is an important method for preserving or increasing the amount of tax-free benefits available from a pension. But obtaining one will not be the best course of action for everyone, and certainly shouldn’t be applied for on a ‘just in case needed’ basis. It is also worth noting that the TTFAC can be applied for after a member’s death by their personal representatives if required.
To help advisers with identifying which clients should consider applying, we’ve developed a free decision-tree, which can be accessed here.
Those who are actively taking benefits and who think a TTFAC will help are those that need to consider this without delay, as they need to apply before any new tax-free lump sums are taken.
Dave Downie is technical manager at abrdn
This is useful. And thanks for the link to the decision tree. I hadn’t seen that.