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Transitional tax-free amount certificate (TTFAC)

Date: 23 December 2024

5 minute read

Key takeaways from this article

  • A transitional tax-free amount certificate can help your client gain further tax-free cash
  • There are nine scenarios where applying for a certificate could be beneficial
  • Not everyone will benefit by applying for a transitional tax-free amount certificate

Index

Transitional Regime Calculator

Use our calculator to carry out a comparison to see which calculation, either standard or transitional, would be better for your client.

Transitional Regime Calculator

1. What is a transitional tax-free amount certificate (TTFAC)?

This is a certificate designed to confirm the amount of Individual's lump sum allowance (ILSA) and how much Individual’s lump sum and death benefit allowance (ILSDBA) is used up by events prior to 6 April 2024. Read 'Transitional regime for past crystallisations' for an explanation of how the certificate works and how to do the calculation. If the only benefit taken is a Pre A-day pension, your client can’t apply for a TTFAC.

2. Who should apply for a TTFAC?

There is no black and white definitive list as to who should apply for a certificate. This is because although it might appear at first sight to be scenario that would benefit from a TTFAC, previous crystallisations in years where the lifetime allowance was higher could offset any benefit gained by a TTFAC.

Here are 9 scenarios where you should carry out a calculation to determine whether your client should apply for a TTFAC.

  1. Benefit crystallisation events, when the lifetime allowance was less than £1,073,100
  2. Your client is over age 75 - and has taken a tax-free lump sum
  3. Defined benefit scheme increases
  4. Benefit crystallisations with no tax-free cash taken
  5. Benefit crystallisations with less than 25% tax-free cash taken
  6. Crystallisation of a disqualifying pension credit
  7. Transferring to a QROPS prior to 6/4/24
  8. 100% of lifetime allowance used
  9. Serious ill health lump sum taken

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

If your client does not have any protection and crystallised when the lifetime allowance (LTA) was less than £1,073,100, they could benefit from a TTFAC.

Example

Miss A – crystallised £400,000 in May 2017 and a further £200,000 in June 2018. Full tax-free cash was taken from each crystallisation.

Standard calculation

TTFAC calculation

Total amount of LTA used is 59.41%.

To work out ILSA and ILSDBA used:

£1,073,100 x 59.41% x 25% = £159,382

Tax-free cash from 2017 = £100,000

Tax-free cash from 2018 = £50,000

TTFAC confirms ILSA used is  = £150,000

2. Your client is over age 75 - and has taken a tax-free lump sum

If your client is over age 75, they will have undergone a lifetime allowance (LTA) test at that age. The LTA used at age 75 is disregarded for the LTA conversion unless the client has taken a tax-free lump sum between their 75th birthday and 6 April 2024. Therefore, clients who have taken a tax-free lump sum after age 75 could benefit from a TTFAC.

Example

Mr B – At age 75 had his first crystallisation which used up 70% of his lifetime allowance (LTA). After his birthday, but before 6 April 2024 he took £50,000 tax-free cash.

Standard calculation

TTFAC calculation

Total amount of LTA used is 70%

To work out ILSA and ILSDBA used:

£1,073,100 x 70% x 25% = £187,792.50

Tax-free cash taken = £50,000

TTFAC confirms ILSA used is  = £50,000

TTFAC confirms ILSDBA used is = £50,000

3. Defined benefit scheme increases

If your client has had a benefit crystallisation event because there was an increase to their scheme pension, this will have used up lifetime allowance (LTA) without there being any PCLS paid. Therefore this client could benefit from a TTFAC.

Example

Mrs C – Took a scheme pension of £20,000 and £125,000 tax-free cash in September 2021. In July 2023 she accepted a pension increase exchange that resulted in 19.91% of the LTA being used.

Standard calculation

TTFAC calculation

Total amount of LTA used is 68.83%

To work out ILSA and ILSDBA used:

£1,073,100 x 68.83% x 25% = £184,653.68

Tax-free cash taken = £125,000

TTFAC confirms ILSA used is = £125,000

TTFAC confirms ILSDBA used is = £125,000

4. Benefit crystallisations with no tax-free cash taken

If your client previously designated to drawdown, purchased an annuity or took a scheme pension and they did so without taking any tax-free cash, they will benefit from a TTFAC.

Example

Mr D – Used £900,000 to purchase an annuity in September 2011 using up 50% of the lifetime allowance (LTA). He did not take any tax-free cash.

Standard calculation

TTFAC calculation

Total amount of LTA used is 50%

To work out ILSA and ILSDBA used:

£1,073,100 x 50% x 25% = £134,137.50

Tax-free cash taken = £0

TTFAC confirms ILSA used is  = £0

TTFAC confirms ILSDBA used is  = £0

5. Benefit crystallisations with less than 25% tax-free cash taken.

If your client previously crystallised and took less than 25% as tax-free cash, they may benefit from a TTFAC.

Example

Miss E – Took benefits in December 2013, from an old scheme that did not pay full tax-free cash. She took £20,000 tax-free cash and a scheme pension of £15,000.

Standard calculation

TTFAC calculation

Total amount of LTA used is 21.33%

To work out ILSA and ILSDBA used:

£1,073,100 x 21.33% x 25% = £57,223.05

Tax-free cash taken = £20,000

TTFAC confirms ILSA used is = £20,000

TTFAC confirms ILSDBA used is = £20,000

6. Crystallisation of a disqualifying pension credit

If your client has previously crystallised a disqualifying pension credit, they would not have been able to take tax-free cash from it, however it will have used up lifetime allowance (LTA). A TTFAC may lead to more tax-free cash being available.

Example

Mr F – Received a disqualifying pension of £125,000 which he crystallised in May 2015. No tax-free cash can be taken from a disqualifying pension credit.

Standard calculation

TTFAC calculation

Total amount of LTA used is 10%

To work out ILSA and ILSDBA used:

£1,073,100 x 10% x 25% = £26,827.50

Tax-free cash taken = £0

TTFAC confirms ILSA used is  = £0

TTFAC confirms ILSDBA used is  = £0

7. Transferring to a QROPS prior to 6/4/24

Prior to 6/4/24, transferring to a QROPS was a crystallisation event that used up lifetime allowance (LTA). There is no disregard to LTA used by a QROPS transfer under the standard calculation so a TTFAC may allow for more tax-free cash.

Example

Mrs G – Transferred £600,000 to a QROPS in August 2018. This used up 58.25% of the LTA.

Standard calculation

TTFAC calculation

Total amount of LTA used is 58.25%

To work out ILSA and ILSDBA used:

£1,073,100 x 58.25% x 25% = £156,270.18

Tax-free cash taken = £0

TTFAC confirms ILSA used is = £0

TTFAC confirms ILSDBA used is = £0

8. 100% of lifetime allowance used

If you have a client who has used 100% of the lifetime allowance but has remaining uncrystallised money to be used for a serious ill health lump sum or death benefits, applying for a TTFAC could lead to 75% of the ILSDBA becoming available.

Example

Mr H – Has fixed protection 2014 and crystallised 100% of his lifetime allowance (LTA). He took the full £375,000 tax-free cash.  

Standard calculation

TTFAC calculation

Total amount of LTA used is 100%

As 100% of LTA used, there is no remaining ILSA or ILSDBA.

Tax-free cash taken = £375,000

TTFAC confirms ILSA used is  = £375,000

TTFAC confirms ILSDBA used is  = £375,000

9. Serious ill health lump sum taken

If you have a client who has had multiple crystallisations of which one was a serious ill health lump sum (SIHLS), they may benefit from a TTFAC.

Example

Mr K – In March 2013 crystallised £400,000 taking £100,000 tax free cash. In May 2023 he took a SIHLS of £300,000.

Standard calculation

TTFAC calculation

Total amount of LTA used is 54.61%

To work out ILSA used:

£1,073,100 x 54.61% x 25% = £146,504.98

To work out ILSDBA used:

£1,073,100 x 54.61% = £ 586,019.91

Tax-free cash taken in 2013 = £100,000

Tax-free SIHLS taken in 2023 = £300,000

TTFAC confirms ILSA used is = £100,000

TTFAC confirms ILSDBA used is = £400,000

 

3. Who should not apply for a TTFAC?

Where a client has previously crystallised when the lifetime allowance (LTA) was higher, a TTFAC might lead to a worse outcome. This is because under the standard calculation previously used LTA is revalued in line with LTA changes. There is no revaluation of previously taken tax-free cash under a TTFAC.

Example

Mrs L – crystallised £800,000, taking £200,000 tax-free cash when the LTA was £1,800,00. She then later in that same tax year, buys an annuity crystallising £100,000 but not taking any tax-free cash. At first glance she fits the scenario of taking no tax-free cash from a crystallisation but because of the tax-free cash taken when the lifetime allowance was higher, she is better off under the standard calculation.

Standard calculation

TTFAC calculation

Total amount of LTA used is 50%

To work out ILSA and ILSDBA used:

£1,073,100 x 50% x 25% = £134,137.50

Tax-free cash taken = £200,000

TTFAC confirms ILSA used is = £200,000

TTFAC confirms ILSDBA used is = £200,000

Remember that once a TTFAC has been applied for, the result is binding. So you should carry out your own calculation before encouraging your client to apply for a TTFAC.

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

Need more help?

Speak to our experienced team. You can reach them Monday to Friday, 8.30am to 4.30pm, by either calling 02380 726 010 or emailing:

The information provided in this article is not intended to offer advice.

It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.