HMRC kindly issued a newsletter on 4th April advising clients to delay taking their pension benefits or transferring until it can fix incorrect legislation relating to the LTA abolition. Yep, you read that correctly, yesterday.

The newsletter admits that the changes to the legislation have affected the calculations for scheme-specific lump sum protection and it states “We are aware that this formula double counts certain benefits and therefore does not operate as intended.” It goes on to say “Until this legislation is effective, schemes should advise affected members to request a delay to the payment of a PCLS under scheme-specific lump sum protection”.

We’re using this blog post as an opportunity to reach out to those near and far about what the implications of this recent announcement truly are. Note, that they’re big and they’re urgent and require quick action!

The impact on the end client is potentially significant so we have prepared some information to show you which clients may be affected and how, but also recommend that you speak to your platform provider to ensure they have the capacity to deal with your ongoing client requirements in this regard.

There are a minority of cases in which the cut-off to let providers know is today, 5th April 2024. This is, therefore, a very tight, time-sensitive piece, which will need immediate attention and action.

The background and implications are set out below.

What is TTFAC?

The transitional tax-free amount certificate (TTFAC) is the way in which a client can have their entitlement to PCLS ‘corrected’ to reflect the fact that previous pension crystallisations may not have resulted in 25% PCLS actually being paid out.

The time limits on a TTFAC

These certificates are able to be applied for before the first crystallisation of benefits since 6th April 2024. In most circumstances, there is the ability to wait and crystallise only when this exercise is done with the client.

Monthly phased drawdown or UFPLS is however automatic and without manual intervention will cause a client to crystallise benefits before they get the chance to successfully get the certificate.

This is more of an acute issue given the fact these certificates are only available from 6th April 2024 and there is likely to be pressure on providers in the first few weeks/months in terms of requests from clients.

Before you consider stopping a client’s monthly crystallisation, you need to establish if the client needs a TTFAC first as not all clients will.

Who would benefit from a TTFAC?

The main time a client needs one of these is if they have crystallised pensions already and as part of this, taken less than 25% of the value used for LTA purposes.

As an example, if a client used 10% of their LTA before 6th April 2024, the new LSA rules would by default provide them with 10% less of the LSA (£268,275 x 90% = £241,448).

The main scenarios in which this applies are:

– Taking a defined benefit scheme pension and not taking any/the full PCLS

– Purchasing an annuity and choosing not to take any/the full PCLS

In addition to these two scenarios, individuals who do not have lifetime allowance protection but who crystallised DC pensions between 6th April 2016 and 5th April 2020 will have done so when the standard lifetime allowance was less than £1,073,100. While they may have taken standard PCLS entitlement at the time, the amount they took had a greater impact on the LTA (and in turn the remaining LSA available in 2024/25) than it would have in other tax years.

There is of course one more test of whether a client would need this certificate. The whole point of the TTFAC is to give the clients the ability to rightfully take up to £268,275 (or more if protection is in place). If the client’s remaining uncrystallised funds are unlikely to be near this level, it is unlikely to be a negative impact for them to simply ignore the need to obtain one of these prior to the next crystallisation. You would have to judge this for yourself considering the client’s existing pension assets, life stage and other goals such as IHT mitigation.

What to do if you find someone who needs a TTFAC?

If you do have a client or clients in this scenario, they need to try and stop any automatic crystallisations from occurring after 6th April 2024 until the certificates are obtained.

Depending on your provider and the dates of disinvestment/payment, this may or may not be possible. If it is possible, the client will need to temporarily make alternative income arrangements until the regular payments can be reactivated.

You may, or may not, have already been contacted by product providers with lists of clients who may be impacted with any crystallisation events being due.

Firms need to engage with providers and their clients to decide how to proceed.

Verve clients can speak to their usual contact or email with any queries or concerns that might impact them.

Click below to download our helpful flowchart we’ve pulled together to show who may be affected, and how:

The Verve Group