Changes to pension taxation: Transitional Tax-Free Amount Certificates

You may have seen and heard many stories in the press about the Labour government and their plans for the budget on October 30th. However, we are drawing your attention to a significant change in the pension rules that came into force on April 6th, 2024, and may require your immediate action.

Since April 6th, 2024, the Lifetime Allowance (LTA), which was the amount you could take from your pension before a lifetime allowance tax charge, has been abolished and replaced with two new allowances:

• The lump sum allowance (LSA) and         
• The lump sum death benefit allowance (LSDBA).

The LSA limits how much tax-free cash a member can take in their lifetime, and the LSDBA is the amount that can be paid out tax-free in the event of a pension member dying before age 75.

However, while both these limits are new, they still consider how much of the lifetime allowance was used before 6th April 2024. Unfortunately, the lifetime allowance could be used up without taking any tax-free cash, such as drawing income from a final salary scheme or an age 75 lifetime allowance test. Therefore, some members may have been disadvantaged if they fall into this situation. The government have introduced Transitional Tax-Free Amount Certificates for those likely to have been disadvantaged.

For example, those who took benefits before the 6^th April 2024, there is a standard transitional calculation to ensure that the above allowances are adjusted. For most people, the standard calculation will consider previous events and be enough to ensure they get the correct amount under the new rules.

However, some individuals may be able to apply for a higher amount. For instance, those people who took less than 25% tax-free on previous crystallisations, those who had taken lump sums from defined benefit pension schemes (which are often less than 25%) and those who had crystallised when the Lifetime Allowance was less than £1,073,100.

Transitional Tax-Free Amount Certificates

This is a certificate that can be provided by the Scheme Administrator of any pension scheme you are a member of. It shows the amount of residual Lump Sum Allowance, Lump Sum, and Death Benefit Allowance you have available. It considers previous payments and crystallisations, including from pre-commencement pensions. It will also show the percentage of lifetime allowance used.

Care should be taken as, in some cases, a certificate could reduce the amount available under the standard calculation that applies for those without a Transitional Tax-Free Amount Certificate. Once issued, the certificate cannot be rescinded unless it contains an error.

Who should consider applying?

• Individuals who drew a final salary pension without taking tax-free cash
• Individuals who crystallised benefits when the LTA was below £1,073,100 (between 2016 & 2020)
• Pension members who transferred funds to an overseas pension.
• Members with Pre 2006 pension income and then took additional pension income between 2006 & 2024.
• Individuals who accessed funds from a non-qualifying pension credit (divorce)
• Individuals who turned 75
• Individuals who used up 100% of their LTA , while a TTFAC may not reinstate any LSA, it will reinstate 75% of the LSDBA.

Who is unlikely to benefit from applying?

• Those who have yet to access their pensions.
• Individuals who took scheme-specific tax-free cash or stand-alone tax-free cash.
• Individuals who crystallised a pension when the LTA was greater than £1,073,100 (between 2006 and 2016) took less than 25% tax-free cash, but the standard calculation will still be better.

How we can help

If you fall into the category where you should consider applying, we will help you determine the merits of the certificate and help you apply to your scheme administrator. Ultimately, this may protect your tax-free entitlement for you or your family in the event of death.

Whilst we are not pension specialists, we are happy to have an outline chat to see what might be your next steps, so please do get in touch with your usual Haines Watts contact or your own financial adviser.