In April 2024, the Lifetime Allowance was abolished. Previously, this was the maximum you could save into a pension without incurring a tax charge. With this change in legislation, new limits on how much tax-free cash can be taken from pensions were introduced. This impacts both the Lump Sum Allowance, which caps the total tax-free cash available during your lifetime, and the Lump Sum Death Benefit Allowance, which limits the amount that can be paid tax-free on death.
If you have taken benefits in the past and still have pensions available to access, this could impact you. The issue is that HMRC needs to measure how much tax-free cash you have already used under the old rules.
If no action is taken, a standard assumption applies. In simple terms, HMRC assumes that 25% of everything you crystallised previously was taken as tax-free cash.
For some people, that is perfectly accurate. For others, it is not.
This can be an issue if, for example, you:
- took less than the maximum tax-free cash at the time
- used scheme-specific lump sum rules
- crystallised benefits in stages or across multiple schemes
In these cases, the default assumption can overstate how much tax-free cash you have already used, reducing what is available in future.
It is possible you will need to apply for a Transitional Tax-Free Amount Certificate (TTFAC). It is issued by your pension scheme administrator and confirms the actual tax-free cash taken before April 2024.
TTFACs can also be important when it comes to death benefits. The new Lump Sum and Death Benefit Allowance limits how much can be paid out tax-free on death. If HMRC assumes too much tax-free cash was used during your lifetime, this can unnecessarily restrict what beneficiaries can receive tax-free. A TTFAC can help ensure death benefits are assessed using accurate figures, which is particularly relevant where pensions form a significant part of estate planning.
A TTFAC is not right for everyone, and there is some administration involved. Once issued, it replaces the default calculation, so it should only be done where it genuinely improves the position. Importantly, if you take some benefits from your pension (since April 2024), the TTFAC cannot be applied for, which may mean you lose some entitlement to tax-free cash.
This can be a complex calculation. If you are looking to take benefits from your pension and would like to review your circumstances to ensure you are ‘doing the right thing’, please contact me. I can talk you through how we can help you plan for your retirement and the options available to you.
