Transitional tax-free amount certificates – what, who, when and how

Dust has settled following new regulations...

On 6 April 2024, the lifetime allowance (LTA) was scrapped.

In its place, three new allowances were introduced: the lump sum allowance (LSA) set at £268,275, the lump sum and death benefit allowance (LSDBA) set at £1,073,100 and the overseas transfer allowance (OTA) set at £1,073,100.

It’s the LSA that is now the primary limit on the amount of tax-free cash someone can take.

Given the speed at which the changes were introduced, there were gaps and errors in the legislation. These were fixed by regulations that came into force on 18 November 2024 (but with effect from 6 April 2024).

For clients moving into the new regime with uncrystallised funds, transitional calculations must take place for those who had already taken benefits from their pensions to determine how much tax-free cash they can take.

There is a standard transitional calculation for this which assumes 25% tax free cash was taken each time LTA was used. Not all clients took the full 25%, however, so there is also a second route whereby clients can reflect their actual lump sums taken by applying for a Transitional Tax-Free Amount Certificate.

Now the kinks have been ironed out by the correcting regulations, it’s worth reviewing how all this works for clients.

Standard transitional calculation

Under the standard transitional calculation, a client’s available LSA is reduced by 25% of their LTA usage as applied to £1,073,100 (or their protected LTA if they have transitional protection).

For example, if your client used 38% of their LTA, their available LSA from 6 April 2024 would be £166,330.

Available LSA = £268,275 – (25% x (38% x £1,073,100) = £166,330

The calculation is the same for the LSDBA.

Thanks to the new regulations, any LTA used at age 75 is now disregarded for the standard calculation, as long as your client didn’t take any tax-free cash after their 75th birthday.

This wasn’t the case previously, and there may be clients who applied for a certificate to effectively get that LTA back. Their certificates remain in place, and there is no action they can take, even if they are now better off under the standard transitional calculation.

What

What if your client took less than 25% tax-free cash? Perhaps under a defined benefit scheme in exchange for a higher pension income?

With a certificate, they can get back some lump sum entitlement and use it under another pension scheme, as the certificate documents in monetary terms what tax-free lump sums were actually paid.

Let’s continue the above example, but let’s say the client had only taken a tax-free lump sum of £80,000 rather than the full 25%.

They could apply for a certificate showing this, which would give them a higher LSA of £188,275 under the certificate calculation.

Available LSA = £268,275 – £80,000 = £188,275

Who

To apply for a certificate, a client must have had a BCE between 6 April 2006 and 5 April 2024. (Transfers to QROPS and age 75 tests are included here.)

If they have pre-2006 benefits and 2006-2024 benefits, they can still apply, but it’s important to note that they cannot get back lump sum entitlement on pre-2006 lump sums.

Instead, the notional value of pre-2006 lump sums is calculated as 25% of the deemed LTA reduction. This is a one-off calculation that would’ve taken place at the first BCE post-2006.

If your client only has pre-2006 benefits, they cannot apply for a certificate.

When

The client must apply for a certificate before their first ‘relevant benefit crystallisation event’ (RBCE). RBCEs include tax-free lump sums, uncrystallised funds pension lump sums, serious ill-health lump sums and most lump sum death benefits.

If your client has passed away and didn’t have an RBCE during their lifetime, the executors must apply before 31 October following the end of the tax year in which a lump sum death benefit is paid.

Once the application has been made, the scheme administrator must issue the certificate to your client within three months.

Your client must then notify all other pension schemes of which they’re a member including lifetime annuity providers. They must do this within 90 days of being sent the certificate.

How

Your client can apply to any ‘certification administrator’ of any pension scheme they are a member of. This means the scheme administrator or lifetime annuity provider. In practice, it will likely make sense to apply to the provider with which the client has uncrystallised funds.

The client must provide evidence of all tax-free lump sums paid, and not just those that were less than 25%.

They must also provide evidence of LTA usage by post-2006 benefits and LTA deemed reduction by pre-2006 benefits.

What constitutes ‘evidence’ is not defined in legislation, so you may find that providers have slightly different requirements.