- The lump sum transitional tax-free amount – the monetary total of all the PCLSs and tax-free part of UFPLS paid to the individual.
- The lump sum and death benefit transitional tax-free amount – the lump sum transitional tax-free amount plus the monetary value of any tax-free part of SIHLS or lump sum death benefits paid out.
Schemes paying out further lump sums would then have to deduct these values from the member’s LSA and LSDBA to get their ‘certified’ (or ‘corrected’) LSA and LSDBA.
It seems bizarre to use monetary amounts and not percentages of LTA used, which are used for other calculations.
What evidence do members need to apply?
Members may only apply for a certificate where they can provide complete evidence to prove they have received a lower amount as tax-free lump sums than that provided for by the standard transitional calculation.
That phrase ‘complete evidence’ is doing some heavy lifting. We do not know exactly what information schemes need, or the format it needs to be in. The industry is hoping HMRC will provide more guidance on this through more newsletters and workshops.
However, we do know members will have to provide evidence of all the tax-free lump sums they have taken between April 6 2006 and April 5 2024 – not just the ones paid out from that scheme, or those lower than 25 per cent of the full crystallisation.
Are the rules set in stone?
Our interpretation of the rules is based on the draft finance bill and two newsletters issued by HMRC. HMRC has promised to issue more guidance on transitional arrangements, including transitional tax-free amount certificates.
HMRC has the power to change the legislation through regulations at any point up to April 2026. So it is likely some details of the new regime will change.
Summary: When is a certificate useful?
A certificate is useful if a member has not received their full entitlement of 25 per cent tax-free cash and wants to boost their LSA. However, this does not magically create new tax-free cash or allow people to take a bigger proportion of one crystallisation as cash.
Instead, to make use of the additional allowance a member would need sufficient uncrystallised pension funds to take that cash from.
It is going to be of most use to those who have previously taken cash and a pension from their defined benefits where the amount of cash is less than 25 per cent of the whole crystallisation, or those who have waived their right to a full 25 per cent PCLS. But only if they are close to their LSA and have further funds to crystallise.
The certificate captures the monetary amount of lump sums previously paid out – not the percentage of the LTA used up in paying them. These could have been paid at a time when the LTA was much higher.
Before applying, it is worth exploring whether the individual’s ‘corrected’ LSA will be higher through the standard transitional calculation or using a certificate.
However as a rule of thumb, if the tax-free lump sums were paid when the LTA was higher then it is likely applying for a certificate would not increase the individual’s LSA.
