Transitional Tax-Free Amount Certificates

A “transitional tax-free amount certificate” is a certificate relating to an individual that is issued by a registered pension scheme on an application made by the member in relation to benefits held prior to 6 April 2024.

Why are transitional tax-free amount certificates being introduced?

The lifetime allowance is being abolished on 5 April 2024 and replaced with new allowances, the lump sum allowance and lump sum and death benefit allowance. Before 6 April 2024, it was the total value of benefits being taken that were tested against the lifetime allowance.

From 6 April 2024, it is the amount of tax-free benefits that are tested against the lump sum allowance and lump sum and death benefit allowance. As part of the abolition of the lifetime allowance, benefits crystallised before 6 April 2024 must be converted into remaining lump sum allowance and lump sum and death benefit allowance.

Who can make the application for a certificate?

Applications must be made by the individual or, if the individual is deceased, the individual’s personal representatives prior to the first Relevant Benefit Crystallisation Event after 6 April 2024. 

A request may not be made after the first Relevant Benefit Crystallisation Event has taken place, in relation to the individual.

What is required from the member or representatives for the statement to be produced?

Applications must be accompanied by complete evidence that accounts for the total amount of lifetime allowance that has already been used. This will include all of the individual’s BCE statements showing the PCLS paid and crystallisation dates.

Additional evidence may include records such as a statement from a scheme showing the amount of lifetime allowance used at a benefit crystallisation event, settlement letters, financial records or bank statements. The total of all the lifetime allowance percentages used, in the evidence, must equal the total percentage the individual lifetime allowance used. If this cannot be provided the scheme can refuse to produce a certificate due to incomplete evidence.

How long does a scheme administrator have to produce the statement after the initial request?

The scheme administrator of a registered pension scheme to which an application is made has three months beginning with the date on which the scheme receives the application and all supporting documents, to either—

• issue the applicant with a certificate, or
• notify the applicant that the application is refused.

What must a certificate contain:

A certificate that is issued following a successful application must contain the following information—

• the individual’s name, address, and national insurance number,
• the individual’s lifetime allowance previously used amount expressed as a percentage of the standard lifetime allowance,
• the amount that the scheme administrator is satisfied is the individual’s lump sum transitional tax-free amount, and
• the amount that the scheme administrator is satisfied is the individual’s lump sum and death benefit transitional tax-free amount.

Where applying for a certificate is not likely to be beneficial

Those who before 6 April 2024:

• Have not crystallised any benefits.
• Only took tax-free cash lump sums when the lifetime allowance was £1,073,100 or more and they only ever took the full 25%.
• Have only taken scheme specific tax-free cash but had no lifetime allowance protection.
• Have only taken a stand-alone lump sum.

Where applying for a certificate is likely to be beneficial:

Those who before 6 April 2024:

• Took less than 25% tax-free cash. 
• Only crystallised benefits when the lifetime allowance was below £1,073,100. 
• Took benefits that contained a disqualifying pension credit. 
• Took benefits that contained GMP and that restricted the tax-free cash paid out to less than 25%. 
• Had an age 75 test, BCE5 or BCE5B.
• Transferred benefits overseas (BCE 8) but still have benefits in the UK that they will crystallise in the UK.

Should you apply for transitional tax-free amount certificate if you had used 100% of the lifetime allowance?

When looking at the legislation, at first there doesn’t seem to be any point as it will not generate any more lump sum allowance, if 25% or more tax free cash was taken. However, there is an impact on the available lump sum and death benefit allowance.

It is important to note that if 100% of the lifetime allowance has been used, the lump sum and death benefit allowance available after 5 April 2024 is reduced to zero.

Applying for a transitional tax-free amount certificate could potentially give back 75% of the lump sum and death benefit allowance.

Notes for the Applicant

Before applying, an individual and their adviser should check their records to make sure applying for a certificate is the best course of action. If not, it is possible the transitional tax-free amount certificate may give the individual a smaller available lump sum allowance and lump sum and death benefit allowance. Once issued the certificate cannot be repealed, so if the member is presented with a lower allowance this will apply.

Applying for a certificate may also be time consuming. For example, it may take an individual a while to pull together all the evidence that is required and  it can take up to three months for the scheme administrator to issue the certificate. If the individual would like to rely on a certificate before their first relevant benefit crystallisation event, pre-planning will be required. This is particularly important if there are any automatic relevant benefit crystallisation events happening shortly after 6 April 2024.

What happens if incorrect information has been provided and errors noted:

If at any time it is found that the amount specified on a certificate does not accurately reflect the individual’s lump sum transitional tax-free amount or (as the case may be) lump sum and death benefit transitional tax-free amount, the certificate must be cancelled by the scheme administrator by giving notice of the cancellation to the applicant or, if the applicant is deceased, the applicant’s personal representatives.

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

Validation:

A certificate comes into force from the date it is issued and ceases to be in force on the provision by the scheme administrator of a notice of errors noted.

Disclaimer:

The above is based our understanding on the HMRC legislation as described in paragraph 127 of schedule 9 to the Finance Act 2024