Guide Transitional arrangements

If an individual hasn’t used up all their lifetime allowance (LTA) before 6 April 2024 and doesn’t apply for a TTFAC, in order to calculate their allowances you need to know their ‘lifetime allowance previously-used amount’,  which is a percentage of the value of any benefit crystallisation events (BCEs) that occurred prior to 6 April 2024.  It's used to reduce the available LSA and LSDBA as follows: 

• Their LSA will be reduced by an amount equal to 25% of the LTA used before 6 April 2024, or deemed to be used in respect of pre-commencement pensions (those already in payment at 6 April 2006), as if the BCE occurred immediately before 6 April 2024.

• Their LSDBA will be reduced by 100% of all BCEs where any serious ill health lump sum (SIHLS) where the individual was under age 75 at the time of payment, or lump sum death benefit (LSDB)  where the individual was under age 75 at the time of death, were paid before 6 April 2024.  Where there’s been no payment of a SIHLS or LSDB before 6 April 2024, or a SIHLS or LSDB was paid but the individual was over 75 at the date of payment or death respectively, the LSDBA is reduced by 25% of the LTA amount used (or deemed to have been used by a pre-commencement pension), as if the BCE occurred immediately before 6 April 2024.

If the individual does apply for a TTFAC, the certificate allows for their LSA and LSDBA to be reduced by the actual tax-free amount(s) paid when the pre-6 April 2024 BCEs occurred.  See ‘Transitional tax-free amount certificates’ for further information on these.

Example – Frank

Frank purchased an annuity using £300,000 of the LTA on 6 April 2006 with a PCLS of £75,000 paid at the same time. On 6 April 2009 he become entitled to a scheme pension which has a value for LTA purposes of £400,000, with no PCLS paid.

Frank’s ‘lifetime allowance previously-used amount is as follows:

Here we cover the transitional rules for how pre-6 April 2024 BCEs reduce the LSDBA where the individual doesn’t hold a transitional tax-free amount certificate (TTFAC).

The approach is broadly the same as for LSA - first you need to know the member’s ‘lifetime allowance previously-used amount’.  This amount is the amount that would have been the ‘previously-used amount’ assuming a BCE occurred immediately before 6 April 2024.  So, it’s the total percentage of LTA already used on 5 April 2024 converted into a monetary amount (or the sum of all previous BCEs with each of them revalued in line with any change in the standard LTA between the BCE date and 5 April 2024).

However, for LSDBA the BCEs that count toward the ‘lifetime allowance previously-used amount’, with the original BCE adjusted for any changes in the LTA, are:

Where an individual holds one of the fund protections, the transitional calculation should be based on their protected LTA.  We cover scenarios where one of the fund protections is held, in the Protections and enhancements page of this guide (coming soon).

If the individual’s ‘lifetime allowance previously-used amount’, is greater than or equal to their LSDBA, then the individual’s LSDBA after applying the transitional calculation will be nil. This means the individual (or their beneficiaries) will be subject to income tax at their marginal rate on any subsequent lump sums or lump sum death benefits.

If an individual used up all their lifetime allowance (LTA) prior to 6 April 2024, their lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBSA) will be nil.  If they still have benefits to take, these could be taken either as fully taxable income (annuity or drawdown), a fully taxable uncrystallised funds pension lump sum (UFPLS), or a pension commencement excess lump sum (PCELS) (only where an UPFLS can’t be paid under pension tax rules).

However, an individual may be able to apply for a ‘Transitional tax-free amount certificate’ where they had used up all their LTA but not taken their full 25% as tax-free cash – for example if they took a full annuity or drawdown, or tax-free cash of less than 25% of their fund.  See the next section for more details on these certificates.

As an alternative to the STC, an individual or their personal representatives if they’ve died, can ask any scheme they’re a member of (or were when they died) to supply them with a ‘Transitional tax-free amount certificate’ (TTFAC).  The certificate confirms their lump sum transitional tax-free amount and lump sum and death benefit transitional tax-free amount, as certified by the scheme after gathering information from the member (or their personal representatives) on the benefits they’ve previously taken.

Individuals whose only ‘pensions in payment’ are pre-commencement pensions (i.e. pensions that were in payment pre- 6 April 2006) and who’ve had no BCEs between 6 April 2006 and 5 April 2024 can’t apply for a TTFAC.  However, those individuals who have had at least one BCE between 6 April 2006 and 5 April 2024 will be able to apply.

The lump sum transitional tax-free amount is the total of all:

• PCLS
• the tax-free elements of UFPLS
• the tax-free elements of stand-alone lump sums
• any other tax-free lump sums

taken before 6 April 2024.

Also, if the individual had a pre-commencement pension 25% of the amount of the ‘deemed’ BCE that occurred immediately before the first BCE (on or after 6 April 2006) is included in the lump sum transitional tax-free amount.  

The lump sum and death benefit transitional tax-free amount is the total of;

• tax-free relevant lump sums taken before 6 April 2024
• tax-free lump sum death benefits paid before 6 April 2024, and
• tax-free lump sums taken before 6 April 2006

If the individual had a pre-commencement pension 25% of the amount of the ‘deemed’ BCE that occurred immediately before the first BCE (on or after 6 April 2006) is included in the lump sum and death benefit transitional tax-free amount.  

The certificate overrides the default (STC) method of calculating an individual’s remaining LSA and LSDBA on 6 April 2024.

So why would someone apply for a TTFAC? HMRC expects that people who have taken less than 25% tax-free cash, or no TFC at all at one or more BCEs before 6 April 2024 might apply. This is because the certificate would allow them more scope to take tax-free amounts from 6 April 2024 than the STC does.  If they took 25% or more as a tax-free lump sum, there is no benefit in applying for a TTFAC as this won’t result in a higher LSA or LSDBA than the STC.

It’s also possible that someone who has used up 100% of their LTA before 6 April 2024 could benefit from a TTFAC where they wouldn’t have any allowances left under the STC, but used less than 100% of the LTA on tax-free amounts.

When applying for a TTFAC the individual must provide ‘complete evidence’ of each lump sum or lump sum death benefit taken.  HMRC doesn’t define complete evidence but gives examples of financial records, BCE statements or bank statements.  The application should only be made to one scheme (normally the one the individual expects to take their first RBCE from after 6 April 2024, but it doesn’t have to be. For example, if an individual has taken most of their benefits from another scheme, it might be better to apply to that scheme, as they’ll have the BCE details on their records), and that scheme will issue the certificate covering all schemes the individual has been a member of.  The scheme has three months from the date of application to either issue the TTFAC or refuse the application, with penalties for the scheme if this deadline isn’t met.  A member may provide, or a scheme may ask for, further information within the three-month window, when considering if complete evidence has been supplied.  A scheme administrator can only refuse to produce a TTFAC where it has insufficient evidence to produce one.  Where an individual is refused a TTFAC and chooses to dispute the decision, this should be raised with their pension scheme. 

The certificate must contain the following information:

•  the individual’s name, address and national insurance number
•  the individual’s ‘lifetime allowance previously-used amount’ expressed as a percentage of the standard LTA
•  the amount that the scheme administrator is satisfied is the individual’s lump sum transitional tax-free amount,
•  the amount that the scheme administrator is satisfied is the individual’s lump sum and death benefit transitional tax-free amount.

It’s important to note that a TTFAC can’t be requested if an RBCE has already occurred in respect of that individual on or after 6 April 2024.  The certificate must have been issued before the member’s first RBCE, as this is the first point at which pension schemes will need to establish an individual’s available allowances and ensure the correct tax treatment of the lump sum or lump sum death benefit being paid. 

Note - currently. there is no requirement for individuals to provide every scheme under which they have remaining rights  with a copy of their TTFAC.  However, the requirement to do so is currently included in draft legislation which we expect to be finalised by the end of the year.

Once a TTFAC has been issued, the member can’t revert to the STC to calculate their available allowances as the TTFAC correctly reflects the tax-free amounts the member has taken and puts them in the correct tax position.

A scheme must cancel a TTFAC and inform the member/their personal representatives that they have done so if they become aware that either the lump sum transitional tax-free amount or lump sum and death benefit transitional tax-free amount is incorrect.  Any scheme the individual is a member of can do this – not just the scheme who issued it.  It’s possible the member may then be liable for any additional tax due, should their available allowances now be less than their certificate stated. 

The member may make another application for a certificate if they have not yet had a relevant benefit crystallisation event.   It’s worth noting a TTFAC can’t be cancelled by the member, only by a scheme administrator if they notice it’s incorrect, so individuals need to be sure they are going to benefit before they apply for one.

Once a TTFAC is cancelled, any future RBCEs will be subject to the STC because there is no longer a TTFAC in force.