Do you need a Transitional Tax-Free Amount Certificate?
Jessica Amodio
Partner & Independent Financial Adviser at GDA
Historically, the lifetime allowance (LTA) was the total amount of pension savings (excluding your State Pension) that you could build up while still getting the full tax benefits. With the abolition of the lifetime allowance, there's no longer an upper limit on the amount of pension funds or benefits that can be accrued without tax charges. But two new allowances have taken its place: the lump sum allowance (LSA), and the lump sum and death benefit allowance (LSDBA). These will limit the amount of lump sums that can be paid tax-free during an individual's lifetime and on their death.
Where a client holds a transitional tax-free amount certificate (TTFAC), their new LSA and LSDBA are reduced by the actual amounts of tax-free cash taken before 6 April 2024 rather than an assumed 25% of their LTA usage. This can help some clients who took less than 25% tax-free cash previously secure an increased allowance.
The certificate will confirm:
the amount of LSA used pre 6 April 2024
the amount of LSDBA used pre 6 April 2024
Without a TTFAC, a default calculation is applied which will look at the amount of lifetime allowance used, and 25% of that will be deducted from both the LSA and LSDBA. However, the problem with the default approach is that it assumes that 25% was taken as a tax-free lump sum every time benefits were crystallised prior to 6 April 2024, which may not have been the case. E.g., those in defined benefit schemes who prioritised income over lump sums.
If you think that you might be affected by this change it is important to contact your financial adviser to discuss how to proceed. In some circumstances, getting a TTFAC would result in a higher figure for the LSA and LSDBA used than if you hadn’t got one, because providers use different calculations to work out the amount of LSA and LSDBA used for people who have certificates and those who don’t.
This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice.
