Transitional Tax Free Amount Certificates (TTFAC)

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, Defined Benefit Lump Sum or Uncrystallised Fund Lump Sum Death Benefit then the amount deducted is 100% of the previously used amount.

Fuller explanations and examples are in 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 will 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.

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

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 with no protected tax free cash, 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. HMRC are bringing forward legislation to make it a requirement for those who receive a certificate to notify all the schemes they are a member of.

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 amount crystallised at 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 not retrospectively become unauthorised payments. 

HMRC are bringing forward legislation to make it a requirement for those who have a certificate cancelled to notify all the schemes they are a member of.