A transitional tax-free amount certificate (TTFAC) is designed to confirm the amount of your lump sum allowance (LSA) that is used up by events before 6 April 2024.
Please note, if you did not access any of your pension benefits (and/or did not transfer any of your UK pension savings overseas) before 6 April 2024, a TTFAC is unlikely to be relevant to you.Background
The LSA and LSDBA replaced the lifetime allowance with effect from 6 April 2024. The standard LSA is £268,275 and the standard LSDBA is £1,073,100. Where you have a specific form of lifetime allowance protection or enhancement your LSA and LSDBA may be uplifted - click on the following link for details.
LTA Protective elections and enhancements
Equally, the LSA and LSDBA are reduced if, before 6 April 2024, you had a lifetime allowance event which effectively reduced your lifetime allowance. Typically, where you have used up all your lifetime allowance, you will have no LSA and LSDBA remaining.
Transitional tax-free amount certificates
- When should I apply for one?
The new regime recognises that where you have had a reduction in your lifetime allowance before 6 April 2024 by virtue of taking pension benefits or transferring all or part of your pension savings overseas, you can consider applying for a TTFAC. This means that these pre-6 April 2024 events are taken into consideration when calculating your LSA and LSDBA.
Some examples of who could benefit from applying for a TTFAC include individuals who before 6 April 2024:
- Turned age 75 and were subject to a lifetime allowance event
- Transferred benefits to a qualifying recognised overseas pension scheme (QROPS)
- Opted for a lifetime annuity but did not choose to take a tax-free lump sum at the same time (or took a tax-free lump sum of less than the maximum 25% available)
HMRC have provided a tool for individuals to use to determine if they should apply for a TTFAC.
- How does the TTFAC work?
Without a TTFAC, if there has been a reduction in your lifetime allowance before 6 April 2024, when you now seek to take pension benefits (and/or transfer your pension savings overseas) under the new regime there is a standard calculation that is completed to identify the ‘lifetime allowance previously used amount’.
Your LSA is then reduced by 25% of this ‘lifetime allowance previously used’ amount.
If you are entitled to a lower reduction in your LSA that arises under this standard calculation, you can apply for a TTFAC, which proves that you are entitled to a lower reduction. This means that your LSA is higher than it otherwise would be without a TTFAC in place.
If 100% of your lifetime allowance was used up under the old regime i.e., due to taking pension benefits up to or over the lifetime allowance limit, your LSA and LSDBA would be zero under the standard calculation.
Examples
a) Individual is better off with a TTFAC
On 1 January 2023, Joe, a UK tax resident, began receiving payments from a lifetime annuity. On this date, the level of lifetime allowance used up by the lifetime annuity was 85%. Joe chose not to take a pension commencement lump sum “PCLS” (tax-free cash) and does not have any lifetime allowance protections in place.
Based on the standard calculation, Joe’s LSA and LSDBA will be:
LSA: £268,275 – ((£1,073,100 x 85%) x 25%) = £40,241
LSDBA: £1,073,100 - (1,073,100 x 85% x 25%) = £845,066
If Joe applied for a TTFAC, his LSA and LSDBA will be:
LSA: £1,073,100 x 25% = £268,275
LSDBA: £1,073,100
In applying for a TTFAC, Joe’s LSA and LSDBA are effectively reinstated to their original limits.
b) Individual is worse off with a TTFAC
On 6 April 2011, Joe, a UK tax resident, began receiving payments from a lifetime annuity. On this date, the level of lifetime allowance used up by the lifetime annuity was 85%. Joe did take a PCLS of 25% which equals £382,500 based on the higher lifetime allowance applicable at that time of £1,800,000. Joe does not have any lifetime allowance protections in place.
Based on the standard calculation, Joe’s LSA and LSDBA will be:
LSA: £268,275 – ((£1,073,100 x 85%) x 25%) = £40,241
LSDBA: £1,073,100 - (£1,073,100 x 85% x 25%) = £845,066
If Joe applied for a TTFAC, his LSA and LSDBA will be:
LSA: £nil*
LSDBA: £1,073,100 - £382,500 = £690,600
* The LSA is reduced to nil as the previous amount of tax-free cash taken was higher than the LSA amount.