Transitional Tax-Free Amount Certificates - When to Apply Examples

In just 2 days, there will be no Lifetime Allowance (LTA) in the UK and we will have some new allowances to restrict the Tax-Free Amounts that can be received from UK pensions.

The Lump Sum Allowance (LSA) of ï¿¡268,275 will apply for any Tax-Free Cash, and the Lump Sum and Death Benefit Allowance (LSDBA) of ï¿¡1,073,100 will apply for any tax-free lump sum death benefits that a beneficiary can receive (where the member dies before age 75).

These allowances will be higher if the member has valid Lifetime Allowance Protection, or lower if they have crystallised benefits before 6th April 2024.?

In some instances where benefits have been crystallised before 6th April 2024, a Transitional Tax-Free Amount Certificate (TTFAC) will be available to increase the LSA and/or LSDBA, including:?

1. Where a UK pension member has a Defined Benefit Pension in payment, which has paid Tax-Free Cash below 25% of the Lifetime Allowance used.?
2. Where UK pension benefits have been transferred to QROPS.?
3. Where 100% of the Lifetime Allowance has been used and the member is below the age of 75.?

Please see the below UK resident case studies for each of the above scenarios.

QB Partners will soon be launching a low-cost service to help advisers check the increases available to the LSA and LSDBA where appropriate, and to assist their clients with an application where it would be beneficial (and importantly to prevent applications where the certificate may result in reduced allowances).

Please register your interest in this service here to receive more information once available.

Example 1

Mr Smith has a UK Defined Benefit scheme which is paying him a pension of ï¿¡40,000 per annum. He also received a ï¿¡100,000 Tax-Free Lump Sum from this scheme at commencement, in June 2017. This used up 90% of his LTA.?

Mr Smith also has a SIPP valued at approximately ï¿¡700,000 which is uncrystallised. As of 6th April, without a TTFAC, Mr Smith will be able to receive a Tax-Free Lump Sum of ï¿¡26,827.50 only (10% of the full LSA). However, although Mr Smith used up 90% of his LTA in 2017, the Tax-Free Amount paid to him was much lower than 25% of the value tested.?

Mr Smith can write to his SIPP provider prior to crystallising his pension to request a TTFAC. With evidence of the Tax-Free Amount paid in 2017, he will be eligible for an Individual Lump Sum Allowance (ILSA) of ï¿¡168,275 (ï¿¡268,275 - ï¿¡100,000).?

A TTFAC in Mr Smith’s circumstances will therefore allow him to receive an extra ￡141,447.50 of tax-free cash from his SIPP. The LSDBA will also be increased by the same amount.

Example 2

Mrs Thomas transferred ï¿¡1,000,000 to a QROPS in 2021. She has continued contributing to a UK pension and has approximately ï¿¡500,000 uncrystallised in a UK workplace pension.?

Mrs Thomas is retiring this year and her UK adviser is seeking clarity on the amount of Tax-Free Cash available to her. We know that without obtaining a TTFAC, Mrs Thomas will have a very limited LSA because 25% of the amount transferred to QROPS will be deducted under the default calculations.

However, as Mrs Thomas did not receive any Tax-Free Amount when she transferred her UK pension benefits to QROPS in 2021, she should be able to apply for a TTFAC to increase her LSA by ï¿¡250,000 (25% of the amount transferred to QROPS), although the amount she can take will still be limited to 25% of the UK pension pot.?

The LSDBA would also increase by ï¿¡250,000.

Example 3

Mr Patel accrued a very large UK pension pot, valued at cï¿¡2m when he retired late last year.?

Mr Patel had Fixed Protection at ï¿¡1.5m which entitled him to a Tax-Free Lump Sum of ï¿¡375,000. He crystallised his pension and used up 100% of his LTA when taking his Tax-Free Cash and designating the balance to drawdown.

Mr Patel is aged 60 and has several children and grandchildren in the UK. On death before age 75, Mr Patel's beneficiaries will not be able to receive any amount as a Tax-Free Lump Sum unless Mr Patel applies for a TTFAC.?

A TTFAC would increase Mr Patel's LSDBA from 0 to ï¿¡1,125,000 (75% of his protected LTA). There would be no impact to the LSA.

QB Partners will soon be launching a low-cost service to help advisers check the increases available to the LSA and LSDBA where appropriate, and to assist their clients with an application where it would be beneficial (and importantly to prevent applications where the certificate may result in reduced allowances).

Please register your interest in this service here to receive more information once available.

#Pensions #LTA #FinancialPlanning