Get ready for transitional tax-free amount certificates

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For financial professionals only

As we count down to the end of the tax year and the impending Lifetime Allowance (LTA) changes, Shaun Tucker explains what you need to know about the new transitional tax- free amount certificates.

For clients who crystallise benefits before 6 April 2024, there’s a standard transitional calculation for reducing their available  Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA).

This means that when calculating their lump sum allowances, 25% of the LTA they've already used will be taken into account. Except if they've received a serious ill-health lump sum, in which case the full amount they've used will be deducted from the LSDBA.

For most clients, the standard calculation will be an accurate reflection of the amount of tax-free cash they’ve already taken.

However, for some, there will be an opportunity to apply for a transitional tax-free amount certificate. Any clients who’ve received less tax-free cash than provided for by the standard transitional calculation will need to provide evidence – or ‘complete evidence’ as it’s termed in the guidelines – to get a certificate.

How to get a certificate from 6th April:

  • complete the form that will be available on the platform and send it to our Client Services team.
  • the applicant must give the calculating scheme complete evidence of the tax-free lump sums already taken, so they can make the relevant calculation.

This is most likely to affect clients who haven’t taken their full tax-free cash entitlement from a DB scheme. It’s important to understand that the total amount of tax-free lump sums they’ve taken is deducted from their LSA to arrive at their transitional tax-free amount.

A certificate won’t provide a better outcome for clients who’ve already withdrawn tax-free lump sums that total £268,275 or more (say, for example, clients who crystallised large amounts when the lifetime allowance was higher than it currently is).

Important: Any clients who want to apply for a transitional tax-free certificate must do so before their first relevant benefit crystallisation event (RBCE), i.e. before the first time they take tax-free cash after 6 April 2024.

This application can only be made once, and once granted, the certificate cannot be reversed. Meaning there’s no opportunity to use the standard calculation after this point – regardless of the outcome.

Any clients that are currently phasing drawdown, for example clients receiving a monthly UFPLS, need careful consideration. Based on the current guidance, the opportunity for them to apply for a certificate will be lost after their first RBCE.

There are still a lot of unanswered questions about the practicalities of the new certificates, so we’ll keep you informed as and when we get more clarity from HMRC.

In the meantime, if you have any questions about the new LSA or any other technical pension issues, get in touch. We’ll be happy to help.

See Shaun Tucker in conversation with Patrick Ingram in our Let’s Talk Retirement webinar - Lifetime Allowance (LTA): What next?  

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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