Transitional Tax-Free Amount Certificates

To support the withdrawal of the Lifetime Allowance, two new allowances apply from 6th April 2024:

– Lump Sum Allowance which is set at £268,275.

– Lump Sum and Death Benefit Allowance which is set at £1,073,100.

Some individuals will benefit from higher amounts if they have Lifetime Allowance protection or enhancements.

For anyone who has taken benefits before 6^th April 2024, there is a standard transitional calculation to ensure that an adjustment is made to the above allowances. For most people, the standard calculation will take into account 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 have taken lump sums from defined benefit pension schemes (which are often less than 25%) and those who have crystallised when the Lifetime Allowance was less than £1,073,100. This is not a complete list, and there are other scenarios where this could occur. These people may wish to consider applying for a Transitional Tax-Free Amount Certificate before their first Relevant Benefit Crystallisation Event which occurs after 5^th April 2024.

What is a Transitional Tax-Free Amount Certificate?

This is a certificate which can be provided by the Scheme Administrator of any pension scheme you are a member of, showing the amount of residual Lump Sum Allowance and Lump Sum and Death Benefit Allowance. It takes into account previous payments and crystallisations, including from pre-commencement pensions. It will also show the percentage of Lifetime Allowance used up.

Care should be taken as in some cases, a certificate could REDUCE the amount available under the standard calculation which applies for those without a Transitional Tax-Free Amount Certificate.

Once issued, the certificate cannot be rescinded unless it contains an error.

Note that members, or the legal personal representatives of a deceased member, can only make one successful application for a certificate, which must be applied for BEFORE the first Relevant Benefit Crystallisation Event occuring on or after 6^th April 2024.

How do I apply for one?

Members will need to make an application to the Scheme Administrator and provide ‘complete proof’ of previous events which affect the above allowances. The legislation allows the Scheme Administrator up to 3 months to provide the certificate, following a successful application with the required evidence.

Although individuals, or the legal personal representatives of a deceased member, can apply to any pension scheme of which they are a current member, the Government expects that individuals will apply to the scheme under which they intend to have their first Relevant Benefit Crystallisation Event, after 5^th April 2024. This will include payments of tax free cash (Pension Commencement Lump Sums) and Uncrystallised Funds Pension Lump Sums after that date.

What is ‘complete proof’?

The rules say that the member has to provide complete proof to the Scheme Administrator, but HMRC has given no guidance yet on what qualifies as complete proof.

We will require documentary evidence of all previous events which have resulted in payments showing the amount of tax-free cash and the tax-free element of Uncrystallised Funds Pension Lump Sums which have been paid. We will also require details of all events which have used up Lifetime Allowance.

For any payments from our own pension schemes, we are likely to have this information already, although we would of course also need evidence of those which occurred under other registered pension schemes.

Should I apply for one?

Members should only apply for one if they are sure this is in their best interests, as in some cases, the provision of a certificate could result in a LOWER amount of tax-free lump sum than would be available under the standard calculation. Once a certificate has been issued, it cannot be rescinded unless it contains an error. Note that these certificates are only available to those who had at least one Benefit Crystallisation Event between 6th April 2006 and 5th April 2024.

We recommend that customers speak to their financial adviser in the first instance, or an accountant or other tax specialist. Note that we cannot provide advice or guidance on this issue.

When will they be available?

We expect to be able to provide them from 6^th April 2024, although it is likely that there will be a period to consider and review the documents provided to us, before a decision can be made on the application for a certificate. The legislation allows the Scheme Administrator up to 3 months to provide the certificate.

Note that the process of introducing the new legislation has not been perfect and indeed HMRC has said that it intends to fix some anomalies in the rules and guidance after 6th April 2024, which will be backdated to 6th April 2024. We have based the information in this article on our understanding of the legislation and HMRC newsletters, which may change.

March 28th, 2024