It may be more than a year since the Lifetime Allowance was formally abolished but issues are still emerging from the mess made by rushed legislation.
Lawmakers knew they hadn’t got it right first time – this was obvious by the inclusion of a “Henry VIII clause” in Finance Act 2024 which allows primary legislation to be amended by regulations.
We’ve had three sets of regulations to sort out the mess, and legislation (more or less) now works as policy intended.
But there are exceptions due to added complications in the rules which serve no obvious purpose.
One such example is the requirement to apply for a transitional tax-free amount certificate (TTFAC) before the first relevant benefit crystallisation event (RBCE).
If the client wants to take PCLS above the level of their available lump sum allowance (LSA) under the standard transitional calculation then this makes sense, but if they don't, why do they need the certificate first? All the certificate does is state the total tax-free lump sums that have been taken since 6 April 2006 (with a calculation for pre A-day pensions where required).
What would be the harm from HMRC’s point of view of allowing them to take PCLS after 6 April 2024 then apply for a certificate which would take this amount into account for subsequent RBCEs?
This was a question asked during the consultation process, but HMRC were adamant they weren’t going to change their stance.
This requirement potentially causes delays for those wanting to take PCLS, as they need to get the certificate first, even when they are nowhere near using up their LSA at that event.
But it is particularly an issue for those who had an age 75 test under the LTA and then took a PCLS before 6 April 2024. Even the updated legislation does not allow schemes to ignore the LTA used up at age 75 in this scenario.
The only way these people can have the age 75 BCEs ignored is to apply for a certificate – but if they’ve already taken further PCLS since 6 April 2024 this isn’t an option either. In this scenario the client is stuck. By simply having their 75th birthday before 6 April 2024 and taking what could have been a small PCLS under the new regime, they could have used a huge amount – or even all – of their LSA. The tax implications for this are potentially significant.
Take the example of a client with £800,000 uncrystallised fund on their 75th birthday, who then took £20,000 PCLS in January 2023 (when the LTA still existed), followed by a further £20,000 PCLS in May 2024. Common sense would suggest that their available LSA should be £228,275 (i.e. £268,275 less 2 x £20,000), and surely this is what policy makers intended.
However, without a certificate the transitional calculation carried out in May 2024 would have shown that £199,999 of LSA was used. That RBCE used up a further £20,000 so now they only have £48,276 available. So, the impact of HMRC’s insistence on the certificate being applied for before the first RBCE – for no discernible reason – has lost the client nearly £180,000 of tax-free cash.
This example shows how important it is to be on top of the rules, but policy makers shouldn’t be writing legislation that adds unnecessary complexity.
Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster