I retired in 2019 at the age of 65. I recently (i.e. this tax year) tried to withdraw cash from a private pension, but the provider told me that I might (or might not) need a transitional tax-free amount certificate (TTFAC). But they failed to explain what a TTFAC was or how it might apply in my case.

I have two SIPPs. I don’t have any lifetime protection.

I have taken the full tax-free cash from my first SIPP in 2021-22 and was told the total percentage of lifetime allowance used up was 35.22%.

Over the last two tax years, I took ad-hoc lump sums from my second SIPP and I want to continue to take these until I exhaust the pension pot.

I’ve stopped withdrawing any money from my pensions until I get clarification on what a TTFAC is. Can you help?

Huw

Rachel Vahey, AJ Bell Head of Public Policy, says:

A TTFC may be a way of boosting your lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA). These allowances are new to pensions after coming into being from April this year. They control the total amount of tax-free lump sums that you can take in your lifetime and that your beneficiaries could receive on your death. Most people’s LSA is set at £268,275, and LSDBA at £1,073,100, but they could be higher if you have some form of lifetime allowance protection.

These transitional certificates may be useful for people who have taken some of their pension pot before April 2024, and want to take more after April 2024. Depending on their personal circumstances, they may not have taken their full tax-free cash entitlement before and so the transitional certificate reflects this.

THE ‘STANDARD TRANSITIONAL CALCULATION’

Usually, people rely on a ‘standard transitional calculation’ to work out how much LSA they have left. This calculation looks at how much lifetime allowance they used up before April 2024 and assumes they took 25% of that amount as tax-free cash. For example, someone who had used up 60% of the lifetime allowance is assumed to have taken 25% of 60% of £1,073,100 – that is £160,965. This would mean they have £107,310 LSA left (£268,275 minus £160,965).

But sometimes people don’t take their full 25% entitlement – for example those in a defined benefit may take a smaller percentage or no cash at all. Using a straight 25% of lifetime allowance would therefore give them a lower allowance.

That’s where a certificate comes in. It looks at the actual amount of cash taken (not 25% of the £1,073,100 lifetime allowance used up) and puts these people back in the correct position.

People could have taken tax-free cash from a SIPP as a ‘pension commencement lump sum’ of up to 25% of the pot and moved the rest of the pension pot into drawdown or bought an annuity. Or they could have taken an ad-hoc lump sum (also called an uncrystallised funds pensions lump sum); before 6 April 2024 this was always 25% tax-free and 75% taxed as income.

Almost everyone accessing their SIPPs takes their full 25% entitlement, and if so, there may be no point applying for a transitional certificate. It wouldn’t change their position.

WHERE A CERTIFICATE IS APPLICABLE

But broadly, there may be a couple of key exceptions. One is where someone reached their 75th birthday before 6 April 2024 when they would have had a test against the lifetime allowance. If they had any pension pot they had not yet accessed, then this would have been counted as part of this test and used up some of their lifetime allowance. But as they didn’t receive any tax-free cash at this time, an adjustment may be needed using a transitional certificate.

Another situation is where someone accessed their pension pot in the years 2016-17 to 2019-20 when the lifetime allowance was lower than £1,073,100. As the standard transitional calculation assumes a lifetime allowance of £1,073,100, so although someone may have received their full 25% tax-free cash, then may be able to apply for a bit more allowance through applying for a certificate.

One final point. A transitional certificate only boosts your allowances. Even if you get a bigger allowance, you still have to have unused pension pot to access and you will be restricted to a maximum of 25% of that pension pot that can be taken tax free. It’s also only useful for those people who have already or are close to running out of LSA to allow them to take more tax-free cash. If you are not close to using your full LSA amount it won’t make any difference to the amount of tax-free cash you can take. This is a fiendishly complicated area. If you make a mistake and apply for a certificate that puts you in a worse position, then you can’t undo this and ignore it. You must use it. Care must therefore be taken. Anyone who is in doubt should consider getting regulated financial advice to help make a decision.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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