What is the Lump Sum Allowance?
The legislation relating to the amount of tax-free cash available within your pension changed from 6th April 2024, replacing the previous ‘Lifetime Allowance’ with the ‘Lump Sum Allowance’ (LSA).
Under the new legislation, you can draw 25% of your pension tax-free, up to a maximum of £268,275 unless you have some form of pension protection. Therefore, any tax-free lump sums you draw from your pension moving forward will use up some of your LSA, and any withdrawals from your pension in excess of £268,275 (or 25% of your pension) will be taxable at your marginal rate of income tax. This new legislation affects people who have taken pension benefits before but still have some either invested or to take in the future.
How is my Lump Sum Allowance calculated?
If you accessed any pension benefits prior to the 6th April 2024, your LSA will be reduced to reflect any tax-free lump sums you have previously taken. It can be complicated to calculate how much of the LSA you have already used; this depends on how, when, and how much of your pension you have accessed previously.
Often, the default calculations used by HMRC can incorrectly assume how much tax-free cash you have actually received. This is because HMRC assumes that any Lifetime Allowance you had used up as at the 5 April 2024, 25% of this was drawn as a tax-free lump sum. As a result, the default calculation may assume that you have taken a greater amount of tax-free cash than you have actually received.
What is a Transitional Tax-Free Amount Certificate?
To avoid any incorrect default calculations for your Lump Sum Allowance, you can apply for Transitional Tax-Free Amount Certificate (TTFAC). This essentially re-calculates your Lump Sum Allowance based on the actual tax-free cash you have received from your pensions.
It is important to note that the TFFAC can only be applied for if you have not accessed your pension benefits since April 2024. If you have already accessed your pension since this date, your Lump Sum Allowance will be based on the default calculations highlighted above.
Once you have applied for a TTFAC, this cannot be reversed. Therefore, it is very important to understand the implications of the TTFAC and it would be prudent to contact your adviser for further guidance.
Will I need to apply for a Transitional Tax-Free Amount Certificate?
There are many instances where you may need to apply for a Transitional Tax-Free Amount Certificate. Below are some examples, but this list is not exhaustive. If you are unsure, please speak to your usual adviser.
How do I apply for a Transitional Tax-Free Amount Certificate?
If you think you may need to apply for a Transitional Tax-Free Amount Certificate, this can only be applied for through your current pension provider. You will need to submit an application form, along with supporting documentation confirming your used Lifetime Allowance, and tax-free cash amounts. Currently, the turnaround for a TTFAC is up to 90 days. If you think you may need to apply for a TTFAC, get in touch with your adviser who will be able to provide further guidance.
