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When determining the amount of lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) that clients have available, there are transitional rules which apply to those who have taken benefits before 6 April 2024.

The standard calculation simply deducts 25% of the individual’s lifetime allowance (LTA) usage from the standard LSA and LSDBA (or higher for those with transitional protections).

Alternatively, an individual can apply for a transitional tax-free amount certificate (TTFAC) which instead allows the actual tax-free amounts taken to be deducted.

However, care is needed - once a client goes down the TTFAC route, they cannot go back to the standard calculation. Before they request one, it’s therefore critical to crunch the numbers to determine whether it will improve their allowances.

Less than 25% tax-free cash taken

Case 1 – Derek

• Derek took benefits from his DB pension scheme in August 2015 when the LTA was £1.25M. This used 75% of his LTA.
• He took tax-free cash of £150,000 – less than the maximum because he wanted a higher ongoing pension.
• Derek also has an uncrystallised SIPP valued at £450,000.

Derek should apply for a TTFAC.

Based on the current value of the SIPP, Derek would not be able to get 25% tax-free cash under the standard calculation, as the available LSA of £67,069 is lower than the 25% amount of £112,500.

However, a TTFAC will give him an available LSA of £118,275, allowing the full £112,500 to be paid – an extra £45,431.

Case 2 – Abi

• Abi used up 40% of her LTA in March 2012, when the LTA was £1.8M.
• She took the maximum tax-free cash of £180,000 from her EPP, with the balance providing an annuity.
• In August 2020, when the LTA was £1,073,100, she fully crystallised a personal pension which had guaranteed annuity rates, using a further 25% of her LTA.
• Because the guaranteed rates were so good, she took no tax-free cash.
• Abi also has £380,000 in SIPP which is all uncrystallised.

Abi should not apply for a TTFAC.

Although Abi took no tax-free cash from her personal pension, under the TTFAC method this is offset by the tax-free cash she received from her EPP when the LTA was higher, as there is no revaluation of the tax-free cash.

Abi has sufficient uncrystallised funds in her SIPP, so she can take the remaining tax-free cash of £93,897 under the standard method. Applying for a TTFAC would have reduced her tax-free cash entitlement by £5,622.

Tax-free cash taken when the LTA was under £1,073,100

Case 3 – Harold

• Harold used 60% of his LTA in July 2018 when the LTA was £1,030,000.
• He took the 25% tax-free cash, giving him £154,500.
• He has remaining uncrystallised funds of £600,000.

Harold should apply for a TTFAC.

A TTFAC will increase both his LSA and LSDBA by £6,465. Harold has enough uncrystallised funds available to make this worthwhile.

Case 4 – Sunita

• In March 2016, Sunita used 20% of the LTA (£1.25M). She received 25% tax-free cash of £62,500, with the balance going into drawdown.
• In March 2018, she used a further 40% of the LTA (£1M). This time she received 25% tax-free cash of £100,000, with the balance into drawdown.
• In May 2020 she used 4% of the LTA (£1,073,100) from a scheme with protected tax-free cash rights. She took scheme-specific tax-free cash of £17,200 (40% of the fund), with the balance transferred into her drawdown plan.
• She has remaining uncrystallised funds of £450,000.

Sunita should not apply for a TTFAC.

Although Sunita took considerable benefits when the LTA was below £1,073,100, she also took some when it was higher, as well as a small scheme with scheme-specific tax-free cash rights over 25% - these offset any possible advantage that a TTFAC may otherwise have provided.

Over age 75 with unused funds

Case 5 – Elizabeth

• Elizabeth turned 75 in June 2023.
• She has fixed protection 2016 which gave her an LTA of £1.25M.
• She crystallised her £1M SSAS fund in May 2020, using 80% of her LTA.
• This gave her tax-free cash of £250,000.
• She also has a SIPP from which she hasn’t taken any benefits yet.
• The SIPP was tested against the LTA at age 75, using 25% of the LTA.
• The SIPP is now valued at £350,000.

Elizabeth should apply for a TTFAC.

If Elizabeth obtains a TTFAC, she will regain tax-free cash of £62,500. This, of course, is less than 25% of her remaining unused funds but, without the TTFAC she wouldn’t be entitled to any more tax-free cash.

Case 6 – Akira

• Akira is age 77.
• He used 80% of his LTA in May 2021 when the LTA was £1,073,100.
• This gave him tax-free cash of £214,620, with the balance going into drawdown.
• Akira’s uncrystallised SIPP funds were tested at 75 using 5% of his LTA.
• The second test at age 75 on his drawdown fund used a further 3%.
• He has remaining funds from which he hasn’t taken any benefits yet are £60,000.
• His drawdown fund is £680,000.

It’s unlikely that Akira will need to apply for a TTFAC.

Yes, a TTFAC would give him a higher LSA and LSDBA. However, the standard calculation currently provides more than enough scope for Akira to take 25% of his unused fund as tax-free cash.

The value of his uncrystallised fund would need to be more than £128,772 (i.e. more than double) for a TTFAC to provide more tax-free cash than the standard calculation. If his fund did grow significantly, he would still be able to apply for a TTFAC if no tax-free cash has yet been taken after 5 April 2024.

The LSDBA is not relevant because lump sum death benefits are only tested against the LSDBA if paid on death before age 75.

Increase LSDBA only

Case 7 – Richard

• Richard, age 65, has used up 100% of his LTA. He has fixed protection 2014.
• He took the maximum £375,000 tax-free cash from his SIPP in October 2017.
• The balance went into income drawdown. The excess funds of £80,000 over his LTA were left uncrystallised.
• His SIPP fund is now valued at £950,000, £115,000 of which is uncrystallised.

Richard should apply for a TTFAC.

Obtaining a TTFAC doesn’t allow Richard to take any more tax-free cash, but it gives him three quarters of the LSDBA back, as only the tax-free cash paid is deducted.

Lump sum death benefits from funds crystallised before 6 April 2024 are not tested against the LSDBA and can be paid tax free. If Richard dies before age 75, a TTFAC would also allow lump sum death benefits from the uncrystallised funds to be paid tax-free – a substantial improvement!

If Richard became seriously ill before age 75, the TTFAC would also give him the option of taking the uncrystallised funds tax-free as a serious ill-health lump sum should be need it.

More information

More information is available in our technical guides ‘Tax-free cash and the lump sum allowance (LSA)’ and ‘Lump sum and death benefit allowance (LSDBA)’.

We also have a tool available to help - ‘Decision tree - who should consider applying for a TTFAC?’