Transitional Tax Free Amount Certificates (TTFAC)

Introduced as part of the abolition of the lifetime allowance (LTA) on 6 April 2024, you can find information about TTFACs below.

LTA

FAQs

TTFAC

What is a TTFAC?

From 6 April 2024, the pension lifetime allowance has been abolished. There is a new lump sum allowance (LSA) of £268,275 which limits the amount most people can take as a tax-free lump sum during their lifetime. There is also a new lump sum and death benefit allowance (LSDBA), which is £1,073,100 for most people which limits the amount that can be taken as a tax-free lump sum during their lifetime or following death before age 75.

For those individuals who had taken some benefits before 6 April 2024, a transitional calculation is provided so that individuals can calculate their available LSA and LSDBA. Normally the LSA and LSDBA is reduced by 25% of the individual’s previously used LTA, although special rules apply where a serious ill-health lump sum was paid before 6 April 2024.

However, individuals with complete and accurate records of the monetary value of tax-free amounts previously received may request that their scheme use this evidence to produce a TTFAC instead of automatically deducting 25% of the individual’s previously used LTA.

This information is our interpretation of the HMRC regulations and gives examples of clients who may or may not benefit from applying for a TTFAC. This should not be taken as financial advice.

Examples of clients who may or may not benefit from applying for a TTFAC

Benefit crystallisation events where less than 25% tax-free cash was taken

We consider a client that took benefits from his DB scheme in December 2022. Securing his scheme pension and taking PCLS used up 60% of his LTA. Due to the scheme basis, he received an amount of £140,000, working out to approximately 22%.

Under the standard transitional calculation:

LSA: £268,275 – 25% x (60% x £1,073,100) = £107,310.
LSDBA: £1,073,100 – 25% x (60% x £1,073,100) = £912,135.

If a TTFAC was granted:

LSA: £268,275 – £140,000 = £128,275
LSDBA: £1,073,100 – £140,000 = £933,100

By applying for a TTFAC, LSA and LSDBA have both been increased.

Benefit crystallisation events when the standard lifetime allowance was less than £1,073,100

The timing of when benefits were taken may result in some individuals being able to benefit from a TTFAC. This is because the standard transitional calculations do not take into account the lower lifetime allowance that was in place between April 2016 and April 2020. We consider the example of a client who had partially crystallised in August 2017, when the standard LTA was exactly £1m:

Fund crystallised: £800,000 (of which £200,000 was taken as tax-free cash).

Standard LTA used up: 80%.

Under the standard transitional calculation:

LSA: £268,275 – 25% x (80% x £1,073,100) = £53,655
LSDBA: £1,073,100 – 25% x (80% x £1,073,100) = £858,480

If a TTFAC was granted:

LSA: £268,275 – £200,000 = £68,275
LSDBA: £1,073,100 – £200,000 = £873,100

By applying for a TTFAC, LSA and LSDBA have both been increased.

Benefit crystallisation events where no tax-free cash was taken (including those over 75)

There were a number of benefit crystallisation events where it was not possible to take any tax-free cash. These include:

    Reaching age 75
    Transferring to a QROPS
    Taking benefits from a disqualifying pension credit

Each of these may have used up some LTA, meaning that the new allowances would be reduced under the standard transitional calculation. We consider the example of someone who reached age 75 in January 2024 with uncrystallised funds:

Fund value as at 75th birthday: £500,000

Standard LTA: £1,073,100

% of LTA used up: 46.59%

Without a TTFAC, LSA and LSDBA would each be reduced by £125,000 (25% of £500,000), even though no lump sums had actually been taken.

By applying for a TTFAC, the LSA and LSDBA would be reset to their full amounts i.e. £268,275 and £1,073,100 respectively. So a TTFAC would be beneficial in this case.

Benefit crystallisation events that used all of the lifetime allowance

Where 100% of the LTA has been used, the standard transitional calculation results in no LSA or LSDBA remaining. In some cases applying for a TTFAC may be of benefit. We consider an example of a client with fixed protection 2012, who has used up their full LTA by crystallising twice:

In June 2006, the client crystallised £1,350,000 and took 25% tax-free cash of £337,500. The standard LTA was £1.5. so 90% of LTA was used.

The client then applied for fixed protection 2012, giving them a personal LTA of £1.8m.

In Nov 2012, the client crystallised up to the limit of their personal LTA. They had 10% of £1.8m remaining, so they crystallised £180,000 and took tax-free cash of £45,000.

Where 100% of the LTA has been used the standard transitional calculation results in no LSA or LSDBA remaining.

If a TTFAC was granted:

LSA: £450,000 – £337,500 – £45,000 = £67,500.
LSDBA: £1,800,000 – £337,500 – £45,000 = £1,417,500.

So applying for a TTFAC would be beneficial in this case.

Some individuals will be worse off with a TTFAC

Once someone has applied for a TTFAC, under legislation they must use it. There is no mechanism by which this process can be reversed, so utmost care must be taken before applying for one as it may result in a worse situation, as the below example shows:

An individual crystallised £1.2m and took £275,000 tax-free cash in June 2006, when the standard LTA was £1.5m. So 80% of the standard LTA has been used. Less than 25% was taken as tax-free cash (approx. 22.9%).

Under the standard transitional calculation:

LSA: £268,275 – 25% x (80% x £1,073,100) = £53,655
LSDBA: £1,073,100 – 25% x (80% x £1,073,100) = £858,480

If a TTFAC was granted:

LSA: £268,275 – £275,000 = Less than zero, so there is no LSA remaining.
LSDBA: £1,073,100 – £275,000 = £798,100.

By applying for a TTFAC, both LSA and LSDBA have been reduced. This individual will have lost the opportunity to revert back to the standard calculation, as under legislation there is no revocation of a TTFAC unless it is erroneous.

This clearly shows the need to be sure of the calculations before applying for a TTFAC.

How to obtain a TTFAC

An individual, or a personal representative, can apply for a TTFAC from a registered pension scheme where the individual is a member or, if the individual is deceased, of which the individual was a member immediately before death. They will need to provide complete evidence of any lump sums or lump sum and death benefits in respect of any pension the client has been a member of.

The scheme administrator will use this evidence to determine the client’s transitional lump sum tax-free amount and transitional lump sum and death benefit tax-free amount and issue a certificate, or decline the application. The scheme administrator has three months from the date of the application to review the evidence and provide a response.

Important things to note before applying

The way the legislation is written means a certificate can give a worse outcome than the standard transitional basis. HMRC have said that once a client receives a certificate, it is irreversible and they must use it even if it is a poorer outcome. Therefore, care needs to be taken before making a request. Nucleus are not liable if the production of a transitional certificate results in a poorer outcome. We can only produce a certificate for individuals who have benefits in a Nucleus pension scheme.

A TTFAC can only be applied for if no relevant benefit crystallisation event has taken place after 6 April 2024.

HMRC's process map for TTFACs

HMRC have published a tool for members to check if they can apply for a transitional tax-free amount certificate from their scheme. Please be aware that HMRC’s tool will not cover all client scenarios.