Transitional arrangements

Overview

With the removal of the lifetime allowance and all but a handful of benefit crystalllisation events (BCEs) and the introduction of new lump sum allowances, BCEs that took place before 6 April 2024 will be dealt with differently under the new regime.  There will be a default method (the Standard transitional calculation) of working out how much the new Lump sum allowance (LSA) and the Lump sum and death benefit allowance (LSDBA) will be reduced by the ‘lifetime allowance previously used amount’. This term is defined as the amount that would have been the ‘previously-used amount’ for the purposes of section 219 of FA 2004 assuming that a BCE occurred immediately before 6 April 2024. Essentially, it’s the sum of all previous BCEs with each BCE revalued in line with any change in the LTA between date of the BCE and 5 April 2024.

However, if an individual wants a more exact valuation, they can apply for a transitional tax-free amount certificate to use instead of the standard transitional calculation (this is likely to be of benefit to those who’ve taken less than 25% tax-free cash before 6 April 2024 - but more on this later). This article will look at both methods of valuation, describe how they work and identify where we’re still awaiting clarity from government and HMRC.

Standard transitional calculation

Firstly, if an individual has used up all their LTA before 6 April 2024, their LSA and LSDBA will be nil. However, if they still have some LTA left, then:

• their LSA will be reduced by 25% of the LTA used up by 6 April 2024 as if the BCE(s) occurred immediately before 6 April 2024. This means that any BCEs that occurred when the LTA wasn’t £1,073,100 need to be revalued.
• their LSDBA will be reduced by the ‘appropriate percentage’.

Paragraph 126 (4) of the Act confirms that the appropriate percentage will be:

• 100% of the previously used LTA where a serious ill health lump sum or death benefits lump sum is paid prior to the member reaching age 75, or
• 25% of the previously used LTA in any other case.

Revaluing previous benefit crystallisation events for the default calculation

An alternative method of working out the LSA and LSDBA for individuals who, like Joe in Example 1, might want to use the exact amounts of PCLS, tax-free elements of UFPLS etc to work out their allowances will also be available. Instead of using the standard transitional calculation, they can apply for a ‘transitional tax-free amount certificate’ or TTFAC – another acronym to remember!

Transitional tax-free amount certificate

HMRC have indicated that they expect applications for transitional tax-free amount certificates to be low in numbers, however, advisers will need to be aware of which of their clients are likely to benefit from making an application, and who would be best to stick to the standard transitional calculation. Once a successful application is made, it’s not possible to revert to using the standard transitional calculation even if that would put the client in a better tax position.

HMRC have said that they will produce guidance on the types of pension savers they expect will benefit from applying for a TTFAC, but this isn’t available yet. We’d expect those who haven’t taken all of their tax-free cash entitlement at BCEs prior to 6 April 2024 to be one group where it may be advisable to apply – but again, it will depend on each individual’s personal circumstances – if someone isn’t likely to breach either allowance, is it worth the bother?

However, we’ve covered the rules here and pointed out some of the issues that industry have raised with HMRC that are still to be confirmed.

Applying for a transitional tax-free amount certificate

The individual, or if they’ve died, their personal representative can apply for a transitional tax-free amount certificate. The application can be made to any scheme the individual is a member of, or where the individual has died, any scheme they were a member of immediately prior to death (HMRC has indicated it’s likely that the application will be made to the scheme the individual wants to take an RBCE from, but it doesn’t have to be).

The application for a TTFAC must be accompanied by ‘complete evidence’ of the amount of the individual’s ‘lump sum and death benefit transitional tax-free amount’. The lump sum transitional amount means the total PCLS and total tax-free element of any UFPLS that the individual has become entitled to before 6 April 2024.  The lump sum and death benefit transitional tax-free amount is the total of the lump sum transitional amount already mentioned plus any tax-free lump sum death benefits paid before 6 April 2024.

Complete evidence means evidence of each lump sum which the individual became entitled to and each lump sum death benefit, if any, that was paid in respect of the individual before 6 April 2024. Currently, there is no guidance as to what constitutes ‘complete evidence’.

Another thing to watch out for is the timing of making the application. It must be done before the individual’s first RBCE on or after 6 April 2024. If the individual has an RBCE and then decides they want a TTFAC, it’s too late – the standard transitional calculation will be used to work out how much LSA and LSDBA they have available at all RBCEs. They must apply before their first RBCE if they want to rely on a TTFAC. This is likely to cause issues for any drip-feed drawdown members who intend to apply for a certificate.

When a scheme receives an application for a TTFAC they have three months to either issue the applicant with their certificate or notify the applicant that their application has been refused.

If the 3-month deadline is missed, HMRC can impose a £300 penalty on the scheme administrator plus an additional £60 for each day’s delay after the £300 penalty has been imposed. 

Applying for a TTFAC from Aegon

Aegon has developed a tool for advisers to help them determine whether it is in their client's best interests to apply for a TTFAC: 

You'll also find links to our TTFAC application forms on this page.

What information needs to be provided on a TTFAC?

There is no set format for a TTFAC, but it must contain:

• 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 ‘lifetime allowance previously used amount’ is explained above,
• 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’, and
• confirmation that the scheme administrator is satisfied as to the amount of the individual’s ‘lump sum transitional tax-free amount’ and ‘lump sum and death benefit transitional tax-free amount’

Once the applicant receives their certificate, they are responsible for providing it to the other schemes they’re a member of. And as mentioned earlier, once a successful application has been made, if the individual then discovers they’d have been better off using the standard transitional calculation, there’s nothing they can do – the TTFAC should be used at each RBCE. 

Cancelling a TTFAC

If a scheme administrator becomes aware the ‘lump sum transitional tax-free amount’ and/or ‘lump sum and death benefit transitional tax-free amount’ on a TTFAC is incorrect they must cancel the TTFAC and inform the applicant or, if the member is deceased, their personal representatives. There is nothing to stop the applicant re-applying for a new certificate with the correct information, so long as it's before their first RBCE.

HMRC confirmed in their Lifetime Allowance Guidance Newsletter - March 24 that if a TTFAC is cancelled any past RBCEs will continue to be reduced by the transitional tax-free amounts. They are considering whether there should be a requirement to notify HMRC where a transitional certificate has been revoked so that HMRC can determine where there is further tax due. However, this is not what they've said in other publications, so we will confirm the final position here, once we know what it is.

For any future RBCEs, these will be subject to the standard transitional calculation because there is no longer a transitional certificate in force. Schemes will be able to calculate the member’s available allowances under the standard transitional calculation because their (revoked) transitional tax-free amount certificate would have stated the individual’s LTA previously-used amount.

HMRC indicated in a previous communication that the applicant is responsible for letting all schemes that they are a member of know that the TTFAC has been cancelled. We await further confirmation of this point in a future HMRC newsletter.

Pre-commencement pensions

If an individual has a pre-commencement pension but no BCEs between 6 April 2006 and 5 April 2024, they cannot apply for a TTFAC.

Individuals with a pre-commencement pension who have had a BCE between 6 April 2006 and 5 April 2024 will be able to apply, but HMRC has confirmed that they need to lay regulations to bring forward changes to the legislation to include tax-free benefits taken pre-6 April 2006.