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What is a Transitional Tax Free Amount Certificate?
The abolition of the Lifetime Allowance on 5 April 2024 and the introduction of the new Lump Sum Allowance and the Lump Sum and Death Benefit Allowance on 6 April 2024 is the biggest change to pension regulations since Pension Freedoms were introduced in April 2015.
One feature of the newly introduced Lump Sum Allowance which has captured a lot of attention is the possibility that individuals who have previously taken some of their pension benefits may be able to access more tax-free lump sums from their pensions.
Sounds too good to be true? You may be right. In this article we aim to provide some clarity as to who might be able to benefit from this new piece of pension legislation.
Who can apply?
The majority of individuals will not need to apply as the standard calculation basis which has been confirmed by HMRC will accurately reflect the amount of tax free lump sum received.
For individuals or Personal Representatives of a deceased individual where there is certainty that:
- they have not received the full tax free cash entitlement of 25% when pension benefits have been taken previously and
- the total amount of tax free cash they have received previously is less than their individual lump sum allowance which, in most cases, will be £268,275 and
- they have pension plans where they have not yet taken any benefits.
The following individuals may meet this criteria:
- Members of Defined Benefit Pension Scheme where they opted to take a full scheme pension and did not receive a tax free lump sum.
- Members of a Defined Benefit Pension Scheme who received a tax free lump sum which was less than 25% of the equivalent benefit value.
- Individuals who’s pension plans contained a Guaranteed Annuity Rate (GAR) and they chose not to take a tax free lump sum so that they could maximise the guaranteed income provided by the GAR.
- Individuals who drew pension benefits between 6 April 2016 and 5 April 2020 when the Lifetime Allowance was below £1,073,100.
- Individuals who had uncrystallised pension pots (pension pots where they had not previously taken any benefits) when they reached age 75 as these were automatically tested against the Lifetime Allowance on their 75th birthday. The standard calculation basis will assume that 25% of the plan value was taken as a tax free lump sum in all cases.
This list is not exhaustive and individuals should speak to a financial adviser if they think they may be eligible for a Transitional Tax Free Amount Certificate before taking any benefits from pension plans after 6 April 2024.
Who do you apply to?
You can only apply to a scheme the individual is a member of or, in the case of a deceased individual, was a member of immediately before their death.
HMRC expect applications for a Transitional Tax Free Amount Certificate be made to the scheme who will pay the first benefits after 6 April 2024.
When should you apply from?
Individuals will need to apply for and obtain a certificate before they take any benefits from their pension funds after 6 April 2024 when they are accessing a pension pot for the first time.
What evidence needs to accompany as request?
Individuals or Personal Representatives will be responsible for providing evidence that the full tax free cash (Pension Commencement Lump Sum) of 25% was not taken when benefits from other pension plans were put into payment before 5 April 2024.
HMRC has not released a detailed list of what constitutes acceptable evidence but Benefit Crystallisation Event Certificates and associated pension benefit statements, confirmation letters and/or bank statements are likely to be needed by the pension scheme to accurately assess any entitlement to an additional tax free lump sum allowance.
And remember, this will apply to all of the pension plans where benefits have previously been taken, not just the pension where you may not have taken the full 25% tax-free lump sum entitlement.
How long will applications take to process?
The current information suggests that pension companies will have a maximum of 3 months to respond to requests for a transitional tax free amount certificate. They have the right to refuse to issue a certificate if they are not satisfied with the evidence provided.
As the certificate will be needed before any benefits are put into payment after 6 April please plan accordingly.
Some Common Myths
“If my pension pots are worth less than £268,275, I can take all of the fund as a tax free lump sum payment.”
This is not true as there are rules in place that limit the total tax free amount you can receive to either 25% of the value of the pension pot you are drawing benefits from or £268,275 – whichever is the lower figure.
“I think I might be eligible so I should apply for one just in case as there is no downside.”
In most cases if you are someone who has received less than 25% of your pension pot as a tax free lump sum applying for a Transitional Tax Free Amount Certificate will enable you to receive more tax free cash.
However, care needs to be taken as HMRC has confirmed that pension providers will take the information needed for the calculations from Benefit Crystallisation Event (BCE) certificates which were issued between 6 April 2006 and 5 April 2024 rather than using the standard calculation basis HMRC has published.
This could potentially reduce the value of any remaining Lump Sum Allowance you thought you had.
Applying for a Transitional Tax Free Amount Certificate is an irreversible decision and you should consult with your financial adviser before proceeding to ensure you do not end up in a worse position.
“I haven’t taken any money out of my pensions yet but I should apply from a Transitional Tax Free Amount Certificate anyway in case they reduce the allowance.”
There is no point in applying for a Transitional Tax Free Amount Certificate if you have not taken benefits from your pensions before 5 April 2024 as there is no tax free amount to be assessed. Pension Providers will not certificate a standard allowance.
This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.