Transitional tax-free cash rules – do you need to take action?

Written by Alan Gow

It’s just a few days now until we enter the post-LTA world.

Jeremy Hunt’s announcement made it all seem so simple. It’s turned out to be horrendously complex. Perhaps the most urgent point to be aware of is that some clients might be able to take more tax-free cash under the new rules than they could under the LTA.

Could your client get more tax free cash under the new rules?

HMRC have effectively given everyone a tax-free cash entitlement of £268,275 (or more if the client has LTA protection). Some clients might have given up the right to some of their tax-free cash in the past. For example, they might have taken low or no tax-free cash under a Defined Benefit scheme or GAR, to get a higher regular income. In these instances (and some others), the client can apply for a Transitional Tax-free Cash Certificate. This gives them the right to take the tax-free cash they previously gave up (subject to certain rules and limits).

Why the urgency?

Well, the certificate must be received BEFORE the first relevant benefit crystallisation after 5 April 2024. For example, if you have clients taking regular UFPLS who could benefit from a certificate, you would need to stop the UFPLS so that no further payments are made until the certificate is received. Otherwise, they won’t be able to apply and any right to additional tax-free cash will be lost. This creates a further dilemma, because most people taking regular UFPLS are living on that money.

Bear in mind that a certificate could put a client in a worse position than if they didn’t have one – this is too complex to explain here, but the bottom line is, the maths needs to be done before the application is made. Once a certificate has been issued, the damage is done.

When will things be clearer?

These new rules are complex, the guidance is not yet finalised and HMRC have 2 years to ask for retrospective changes to legislation. The main thing is to be aware of the trip hazards and the importance of getting full details of all the pensions your clients hold. This will be particularly important for those with pots close to or exceeding the new allowances.

If in doubt, talk to us and we’ll do our best to help.