Transitional regime for past crystallisations

When working out available allowances you can either use the standard transitional calculation or your client can apply for a transitional tax-free amount certificate and use that instead. No one should automatically apply for a transitional tax-free amount certificate as it is possible it could lead to a worse position than the standard transitional calculation. Once an application is made the result is binding and cannot be rescinded. So before applying for a certificate you should carry out your own calculation. Below we explain how the calculations for each example works.

1. Standard transitional calculation

Where a client has used up 100% of their Lifetime Allowance (LTA), there is no available Individual Lump Sum Allowance (ILSA) or Individual Lump Sum and Death Benefit Allowance (ILSDBA) under the standard transitional calculation.

The standard transitional calculation consists of two steps:

1. Calculate the monetary amount of LTA previously used up in the same way that you would if you did the calculation on 5/4/24. This means:
   1. for people with no protection apply the percentage of used LTA against £1,073,100
   2. for people with Fixed or Individual protection apply the percentage of used LTA against their personal LTA
   3. for people with all other protections revalue the previously taken monetary amount in the same way that you would under section 219 of the Finance Act 2004
   4. disregard any amount crystallised at age 75 unless the client has taken tax-free cash ( via a pension commencement lump sum, serious ill health lump sum or an uncrystallised funds pension lump sum) between age 75 and 6/4/24
   5.  
2. Deduct a portion of this monetary amount from ILSA and ILSDBA
   • For ILSA - deduct 25% of the monetary amount from ILSA
   • For ILSDBA you deduct either:
     • 100% of the monetary amount if a serious ill health lump sum (SIHLS) or lump sum death benefit of any size has been taken before age 75, or
     • if neither of those have been taken, deduct 25% of monetary amount from ILSDBA.

Example

Your have a client aged 60 whose most recent BCE statement shows an LTA utilisation figure of 40% (which equals a monetary figure of £429,240). They decide to take further pension benefits after the 6 April 2024.

2. Transitional tax-free amount certificate

Instead of the standard transitional calculation described above the member may have a transitional tax-free amount certificate that will detail how much of ILSA and ILSDBA they have used up before 6 April 2024.

The purpose of the certificate is give clients that have received less than their 25% tax-free cash the ability to take the missed tax-free cash going forward. The certificate will represent tax-free cash taken across all schemes. A client can request a certificate from any scheme they are a member of as long as they can provide evidence of every previous crystallisation they have had. The evidence will need to show how much of the crystallisation related to tax-free cash as well as the associated pension. If insufficient evidence is provided, the scheme can refuse to issue a certificate.

If the client has a Pre A-day pension in payment and the first crystallisation was prior to 6/4/24, there is a deemed amount of tax-free cash for the TTFAC calculation. The tax-free cash amount to be used is 25% of the deemed LTA, at the first benefit crystallisation event. The deemed LTA used is 25 x (the annual pension/max GAD for capped drawdown at the date of the first crystallisation). So there is no need to ask the Pre A-day pension provider for details of any tax-free lump sums taken.

Certificates are binding, even if they lead to a client having less tax-free cash available under the certificate than they would have under the standard transitional calculation. So you should take care to do your own calculation first before getting your client to make a certificate application.

Application Deadlines for Certificate:

• For clients: The deadline to apply for this certificate is before the first relevant benefit crystallisation event after 5th April 2024.
• For Legal Representatives of deceased clients: If no relevant lump sum was taken while the client was alive, the deadline for a legal representative to apply for this certificate is 31st October following the end of the tax year in which the relevant lump sum death benefit is paid.

The information a client would need to provide to their scheme is

If a scheme is provided with evidence of the information above, the scheme will then issue them with a certificate showing their ILSA and ILSDBA transitional tax-free amount. Clients will need to provide this to pension schemes in the future when they take further lump sums.

3. Comparison of calculations

Let’s look at a simple example where a transitional tax-free amount certificate would give a client more tax-free cash than the standard transitional calculation.

Under the standard transitional calculation, as 100% of the LTA has been used up, there are no available allowances. This means the remaining £500,000 when crystallised will not provide any further tax-free cash.

Under a transitional tax-free amount certificate calculation, ILSA used is £350,000 and ISLDBA used is £350,000.

As this leaves £25,000 remaining ILSA the client could crystallise their remaining £500,000 and take £25,000 tax-free cash.

4. Help with comparisons

Use our calculator to carry out a comparison to see which calculation would be better for your client.

Transitional Regime calculator