Pensions

Transitional Tax Free Amount Certificates (TTFAC)

Last Updated: 6 Apr 24 10 min read

The Lifetime Allowance was replaced with three new allowances from 6th April 2024. Benefits taken under the LTA regime use up the new allowances. A Transitional Tax Free Amount Certificate allows a bespoke client deduction from the LSA and LSDBA instead of the standard transitional deduction.

1. Key Points

2. What is a Transitional Tax Free Amount Certificate?

3. Who could benefit from a Transitional Tax Free Amount Certificate?

4. Applications for a Transitional Tax Free Amount Certificate.

Eligible Applications
Complete Evidence
Certificates

5. What are the "transitional tax free amounts"?

6. What happens when a certificate ceases to apply?

Key Points

TTFACs reflect actual tax free amounts paid to an individual before 6th April 2024
Some could be worse off with a TTFAC
They must be issued prior to the first post 5th April 2024 RBCE

What is a Transitional Tax Free Amount Certificate (TTFAC)?

One of the key factors in the new allowances regime is how to account for previously used LTA against the new allowances.

This is done by a standard calculation based on the “lifetime allowance previously-used amount”. This is the amount that would have been the previously-used amount for the purposes of working out how much of someone’s lifetime allowance they had available under the old LTA rules assuming they had a BCE on 5 April 2024.

The lump sum allowance is reduced by 25% of the previously used amount. Meaning if 100% of LTA was used the lump sum allowance is Nil.

There is an equivalent deduction to the LSDBA however where some or all of the previously used amount is in respect of a Serious Ill Health Lump Sum then the amount deducted is 100% of the previously used amount.

Fuller explanations and examples are in our our Lump Sum Allowance and Lump Sum and Death Benefit Allowance articles.

However, an individual (or their personal representatives if they have died) can apply for a Transitional Tax Free Amount Certificate.

These certificates are provided by a registered pension scheme and are used to prove that the scheme member is entitled to a lower reduction in their LSA and LSDBA than that provided for by the standard default calculation.

It should be noted that a scheme must issue a TTFAC if requested, so in theory an individual could become worse off with a TTFAC.

HMRC have confirmed in Pension Scheme Newsletter 158 that they intend to widen the issuing of TTFAC's to annuity providers. Until such times as the amending legislation is effective it wil not be possible to request a TTFAC from an annuity provider.

Who could benefit from Transitional Tax Free Amount Certificate (TTFAC)?

A TTFAC may benefit those whose actual tax free amounts of lump sums they became entitled to is lower than the standard transitional calculation.

Even though there may be lower tax free amounts on the TTFAC basis, it does not necessarily mean that there will be a benefit to a certificate.

If the aggregate of uncrystallised funds yet to be taken, including any future contributions or accrual, is not going to be high enough to utilise the additional allowance then it may not be necessary to apply for a TTFAC. Likewise, if there is no possibility of any Serious Ill Health Lump Sums or lump sum death benefits being paid then additional LSDBA would be irrelevant.

Example

Roy does not have any protections.

He took PCLS and drawdown in June 2016 using up 30% of the LTA which was £1 million at the time.

His default deduction is 30% x £1,073,100 x25% = £80,482. He only had PCLS of £75,000

His initial LSA is therefore £268,275 - £80,482 = £187,793.

His initial LSDBA is therefore £1,073,100 - £80,482 = £992,618.

Roy has stopped paying into his pension and only has uncrystallised funds of £110,000. There are no sizeable lump sum death benefits foreseen.

He intends to use these for drawdown over the next couple of years.

His LSA supports a fund of £751,172 (this is the uncrystallised fund value needed to use up his standard default LSA).

As he is unlikely to benefit from an extra £5,482 LSA and LSDBA Tom decides not to apply for a TTFAC.

The individuals most likely to benefit are those who have used up some or all of their LTA but did not take their full amount of tax free entitlement.

Those who believe they have had full tax free cash could still benefit as the test against the LTA applies as at 5th April 2024 not when benefits were taken.

Individuals most likely to have additional tax free amounts under the TTFAC basis are those who:

took benefits when the LTA was under £1,073,100 (2016/17 to 2019/20)

took benefits from a money purchase pot with GARs or GBA's and may not have taken their full tax free cash.

took benefits from a defined benefit scheme are less likely to have taken full tax free cash. This could be where commutation factors were poor or in an 1/80ths plus 3n/80ths scheme the percentage would be around 12% not 25%.

used LTA on events that did not include tax free amounts:
- BCE3 - increase to scheme pension above the permitted maximum
- BCE5s - when attaining age 75
- BCE8 - transfer to QROPS
- BCE9 - other BCEs allowed by regulations

As the TTFAC applies to the LSA and LSDBA jointly there may be no benefit to the LSA but there could be on the LSDBA.

Some people could be worse off with a TTFAC.

Example - individual better off

Sandi has Fixed Protection 2016.

She took a scheme pension with no PCLS in August 2023 which used up 90% of her protected LTA. She still has over £400,000 in her SIPP uncrystallised.

Her default deduction is 90% x £1,250,000 x 25% = £281,250.

Her initial LSA is £312,500 - £281,250 = £31,250.

As her LSA is used by a fund of £125,000 and she has funds well in excess of this amount she will ensure she gets a TTFAC before she takes any further benefits.

Example - individual better off but only on LSDBA

Bob had no protection and put £1,000,000 into drawdown, taking PCLS of £250,000 in January 2024.

In January 2024 he took a Serious Ill Health Lump Sum of £83,100. £73,100 of this was tax free.

Sadly he passed away in May 2024 at the age of 64.

His current employer is about to pay a Lump Sum Death Benefit of £100,000 which is the only option under their scheme.

As Bob had a SIHLS the full amount of his LTA previously used amount is deducted from his allowances.

His LSA is irrelevant as he has died but his LSDBA is £0.

Bob's personal representatives, request a TTFAC from the scheme about to pay the LSDB and ask they delay payment until the certificate is issued.

Bobs lump sum and death benefit transitional amount (post the certificate being issued) is £250,000 + £73,100 = £323,100.

His LSDBA is now £1,073,100 - £321,100 = £750,000.

His beneficiaries can therefore receive the £100,000 with no tax liability.

Example - individual worse off

George put £1.2m into drawdown in March 2012 when the LTA was £1.8m.

This used 66.66% of his LTA. He took PCLS of £300,000. He still has uncrystallised funds and is intending to pay more into his pension.

His standard transitional deduction is 66.66% x £1,073,100 x 25% = £178,832.

His initial LSA is £89,443.

As his tax free amounts paid are over £268,275 he would have no LSA if he applied for a TTFAC. Additionally, his standard default for the LSDBA would be £894,268 without a certificate, with a certificate this would be £773,100.

Applications for a Transitional Tax Free Amount Certificate (TTFAC)?

Individuals, or their personal representatives, can apply for a Transitional Tax Free Amount Certificate.

Schemes have to either issue a certificate or refuse to issue one within three months of the application (application and complete evidence).

If a scheme administrator believes a certificate to be incorrect they must notify the individual, or their personal representatives, that the certificate is cancelled.

If an application is refused, a certificate cancelled or found to be inaccurate then a new application can be made as long as the individual still meets the eligibility criteria (see below).

Where an individual fraudulently or negligently makes a false statement, or a pension scheme administrator assists in providing a statement they know to be inaccurate, a penalty of £3,000 can be issued.

Eligible Applications

A certificate:

cannot be applied for if someone has Enhanced or Primary Protection and meets the lump sum condition (their tax free rights as at 5 April 2024 were above £375,000).

must be applied for by the individual or the individuals personal representatives where they have died
can be applied for from any scheme in which the individual is a member (or was immediately prior to death)
must be requested along with complete evidence of previous amounts paid
must be applied for AND ISSUED prior to the first RBCE after 5th April 2024

NB an individual with Enhanced Protection does not have their LSDBA assessed on transitional rules but may still benefit from a higher LSA.

Complete Evidence

When applying for a certificate complete evidence must be supplied, or an application will not have been deemed to have been made.

This would be evidence of the:

lifetime allowance used

amount of any tax free amounts paid

The evidence must allow the scheme administrator to determine the portion of the LTA used that was taken as tax-free lump sums. This by definition will be done on a case by case basis.

Some examples of appropriate evidence would be financial records, payment confirmations from schemes, BCE statements or bank statements.

Certificates

There is no prescribed format for a certificate, it can be a standalone document or incorporated in any other document a scheme issues.

There is however prescribed in formation that must be issued. It must include the individual's:

name, address and national insurance number

lifetime allowance previously-used amount expressed as a percentage of the standard lifetime allowance

lump sum transitional tax free amount

lump sum and death benefit transitional tax free amount

Once a certificate is issued it cannot be amended or replaced.

At present there is no need for an individual to proactively notify schemes that they have received a TTFAC.

What are the "transitional tax free amounts"?

Lump sum transitional tax-free amount

This is the sum of the tax free amount paid of:

Pension Commencement Lump Sums

Uncrystallised Funds Pension Lump Sums (tax free amount)

Standalone Lump Sum

In addition, where there was a pre 2006 pension in payment there is to be added 25% of the deemed BCE.
HMRC had initially indicated the addition would be the actual amount of tax free cash paid prior to April 2006 but in amending regulations on 14th March 2024 they adopted a different approach to what was previously indicated.

Lump sum and death benefit transitional tax free amount

This is the amount of the lump sum transitional amount, plus the tax free amount of any:

Serious Ill Health Lump Sum

Defined Benefit Lump Sum Death Benefit

Uncrystallised Fund Lump Sum Death Benefit

What happens when a certificate ceases to apply?

A certificate could cease to apply under two circumstances.

Firstly, and perhaps unlikely in practice, is where an individual identifies that a certificate is inaccurate.

Secondly, a scheme administrator may cancel a certificate if it is found to be invalid or inaccurate.

Where the individual has not had a RBCE then they could reapply for a new certificate.

In either case above, the individual's allowances should be recalculated using the standard transitional calculation.

This may result in a tax liability if the tax free amounts paid since 5 April 2024 are higher than the individuals actual allowances. They should report this to HMRC to correct their tax affairs. HMRC confirmed in PSN158 that they were bringing forward regulations to ensure previous lump sums paid do nto retrospectivley become unauthorised payments.

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