The Lifetime Allowance is disappearing

Take action now ahead of tax year end

In the 2023 Spring Budget, the Chancellor announced he was abolishing the Lifetime Allowance (LTA) from 6 April 2024.

It will be replaced with two allowances:

  • a Lump Sum Allowance of £268,275, and
  • a Lump Sum & Death Benefit Allowance of £1,073,100

Are there transitional arrangements available?

Some of your clients might need to apply for a Transitional Tax-Free Amount Certificate (TTFAC) where they have crystallised benefits before 6/4/24 and taken less than the standard 25% tax free.

A TTFAC confirms how much an individual has used of their Lump Sum Allowance and Lump Sum Death Benefit Allowance through crystallisation events before 6 April 2024.

Why is it important to take action ahead of the tax year end?

A TTFAC must be issued before the first payment of any tax-free lump sum on or after 6 April 2024. However, it can’t be issued before the end of the current tax year.

This means if you have a client – such as one in Phased Drawdown – with a payment date soon after the start of the new tax year, who would benefit from having a TTFAC, you need to take immediate action.

For example:

  • If you have a client with a crystallisation event in April, you should consider delaying that event.
  • For clients with regular crystallisations or phased drawdown* arrangements, you should consider cancelling or suspending those until their pension scheme has issued the certificate.

* If your client is receiving Target Income phased drawdown, you won’t be able to reinstate this as it is one of our legacy drawdown options.

Who should apply for a TTFAC?

Under the new rules, the conversion of benefits taken under LTA rules assumes 25% of the benefits were paid tax free at each benefit crystallisation event, but this won’t always be the case.

Where a member has taken less than 25% of their benefits tax free, you should consider whether the total amount of tax-free benefits is less than the assumed 25% under the standard conversion method.

Scenarios where members should consider applying for a TTFAC

  • Used 100% of their LTA – the assumption is they will not have any Lump Sum Allowance or Lump Sum & Death Benefit Allowance available. However, even if they have taken 25% tax-free cash, they can increase their available Lump Sum Allowance and Lump Sum & Death Benefit Allowance with one of these certificates.

  • Had a benefit crystallisation event but not taken any tax-free cash – this may happen if they took the full guaranteed pension from a defined benefit arrangement rather than commuting some for tax-free cash.

  • Had a benefit crystallisation event when the LTA was less than £1,073,100

  • Your client is aged over 75 – if a member had uncrystallised funds at age 75, there is an age 75 LTA check which uses up LTA and no tax-free cash would have been paid.

  • Crystallisation of a disqualifying pension credit – this is where an individual gets a pensions and divorce transfer from their ex-spouse in relation to benefits where tax-free cash had already been taken. This prevents your client from taking tax-free cash from that portion of their benefits.

  • Transferring to a QROPS before 6 April 2024 – no tax-free cash payable on transfer, but most people transfer all benefits overseas, so have no remaining UK benefits from which to take any further tax-free cash.

  • Benefits in payment before 6 April 2006 – if a member had benefits in payment before this date and has crystallised further benefits after this date, the pre A-day benefits use up LTA, so they may qualify depending on the actual tax-free cash paid from benefits before 6 April 2006.

  • Serious ill health lump sum taken – most people take all benefits under serious ill health, but where they have taken standard retirement benefits previously, the assumptions used for converting benefits in such a scenario uses 100% of the LTA used – against the Lump Sum Allowance.

Who doesn’t need to apply for a TTFAC?

You don’t need to worry about planholders who:

  • have always taken 25% of their benefits tax-free unless they have used 100% of their Lifetime Allowance, or
  • will not have any uncrystallised funds after 5 April 2024.

How does a member apply?

Your clients can only get a TTFAC from a pension scheme where they are a current member.

If you or your client ask the scheme for a certificate, the scheme will ask the member to complete an application form and provide documentary evidence showing:

  • the lifetime allowance percentage already used, and
  • the monetary amounts of tax-free benefits paid, including where:
    • no tax-free benefit was paid
    • an UFPLS was paid, and
    • the tax-free element of the UFPLS.

Any questions?

If you’d like to know any more about the abolition of the lifetime allowance and what you need to do next for your clients, please contact your Business Development Manager.

Important information

It’s possible that an individual’s TTFAC could show a higher amount of actual tax free payments than indicated by the standard calculation used to convert LTA used into the new allowances. If this happens, we can neither ignore nor cancel the certificate. Because of this, it’s important to make sure your clients don’t apply for a TTFAC where this may happen. Instead, you should compare the actual tax free payments with the standard conversion calculations before recommending they apply for a certificate.