Lump Sum Allowances

The lifetime allowance set a limit on how much could be saved into a pension during your lifetime before additional tax charges were applied. The Government approved legislation in the 2023 Finance (No.2) Act that removed the lifetime allowance from 6 April 2024.

What is the impact on my Pension Benefits?

From 6 April 2024 onwards there is no longer a limit on the value of Pension benefits that can be built up without any additional tax charge.

The Government has though introduced three new lump sum allowances that between them act to limit the tax-free benefits from a pension in the same way that the lifetime allowance framework did.

Lump Sum Allowance – This is the maximum amount of tax-free lump sum that can be paid from all of your pensions. The limit is £268,275 which is the same as the maximum that could have been paid under the lifetime allowance framework (it’s 25% of lifetime allowance which was £1,073,100.

Lump Sum and Death Benefit Allowance - This is the maximum amount of tax-free lump sum that can be paid if you die before the age of 75 or have a life expectancy of less than one year and so can be paid a serious ill-health lump sum The maximum is £1,073,100 which is again the same amount that could have been paid under the lifetime allowance framework (it’s 100% of the lifetime allowance amount which was £1,073,100).

Overseas Transfer Allowance – This is the maximum amount of pension that can be transferred overseas to a Qualifying Recognised Overseas Pension Scheme without having a tax charge. The maximum is £1,073,100 which is the same amount that could have been transferred without a tax charge under the lifetime allowance framework (it’s 100% of the lifetime allowance amount which was £1,073,100).

In the same way as the lifetime allowance worked each of the three new allowances reduces each time pension benefits are taken.

As there is no longer any requirement for lifetime allowance tests anyone with protection had their lump sum allowances adjusted so that they give the same value of benefits as the old framework. We explain this in more detail below. The lifetime allowance certificate you received from HMRC will show what type of lifetime allowance protection you have.

What if I have Fixed and Individual Protection?

• You will have a personal Lump Sum Allowance of 25% of your Protected Lifetime Allowance.

• Both your Lump Sum Death Benefit Allowance and Overseas Transfer Allowance limit will be 100% of your Protected Lifetime Allowance.

For example: if you have what’s called Fixed Protection 2016 your Protected Lifetime Allowance is £1,250,000.

From 6 April 2024, your Lump Sum Allowance will be £312,500 (25%) and your Lump Sum and Death Benefit Allowance and Overseas Transfer Allowance will be £1,250,000 (100%) which is the same tax-free maximum as under the Lifetime Allowance.

What if I have Enhanced Protection?

• If you have protected Pension Commencement Lump Sum rights your personal Lump Sum Allowance will be the maximum that could have been paid out on 5 April 2023.

• If you do not have this protected your personal Lump Sum Allowance maximum will be £375,000.

• For both Lump Sum and Death Benefits Allowance and Overseas Transfer Allowance your maximum is the amount you could have been paid on 5 April 2024.

For example: if you have a protected Pension Commencement Lump Sum of 20% of your funds

From 6 April 2024, your Lump Sum Allowance will be 20% of the fund value on 5 April 2023 and your Lump Sum and Death Benefits Allowance and Overseas Transfer Allowance will be the value of your pension fund not yet in payment on 5 April 2024.

What if I have Primary Protection?

• If you have protected Pension Commencement Lump Sum rights your personal Lump Sum Allowance will be:

The registered tax-free cash from 5 April 2006 increased by 20% (multiplied by 1.2) less:

• Any tax-free cash taken since 6 April 2012, and
• Any tax-free cash taken between 6 April 2006 and 5 April 2012 as increased by £1.8M/the standard LTA at the time the tax-free cash was taken

• If no protection then your personal Lump Sum Allowance maximum will be £375,000.

• For both Lump Sum and Death Benefits Allowance and the Overseas Transfer Allowance your maximum is £1.8m increased by the protection amount shown on your Primary Protection Certificate.

For example: if your Primary Protection Certificate has a protection amount of 0.26 and a Protected Pension Commencement Lump Sum of £400,000.

From 6 April 2024, your Lump Sum Allowance will be £480,000 (20% increase) and your Lump Sum and Death Benefit Allowance and Overseas Transfer Allowance will be £2,268,000 (£1.8m x 1.26) which is the same tax-free maximum as under Lifetime Allowance.
 

What you need to consider:

Although Lifetime Allowance Protection increases your total personal tax-free allowances the benefits you receive from each pension policy may be limited by the value of the funds being taken and the rules that apply to the policy.
 

Each of your new personal Lump Sum Allowances will be reduced to take into account the value of benefits you already received.

Lump Sum Allowance
Your Lump Sum Allowance is reduced by the value of any tax-free lump sums paid to you before 6 April 2024.

Two methods are used to calculate the deduction they’re called the Standard method or the Alternative method:

Using the Standard method – It is assumed you took 25% of the value of benefits you used under the Lifetime Allowance framework before 6 April 2024 as a tax-free lump sum.

or

Using the Alternative method – Before you first take benefits after 6 April 2024 you apply for a Transitional Certificate which means the deduction is based upon the actual tax-free cash you were paid rather than an assumed amount.

Please see Question 6 on how you can get a Transitional Certificate.

What you need to consider: There is an exception if you took benefits before 6 April 2006 and have taken no more since. In that case, the deduction is 25% of the value of your pension in payment. The value of the pension in payment is the annual payment at the time benefits are first taken after 6 April 2024 multiplied by 25.

The following table shows examples of how the Standard method works for someone who used 80% of their Lifetime allowance before 6 April 2024 for each of the different types of protection:

Lump Sum Death Benefit Allowance

Your Lump Sum and Death Benefit Allowance is reduced by 25% of the value of benefits you used under the Lifetime Allowance framework.
Unless you have been paid a serious ill-health lump sum under the old Lifetime Allowance rules (so before 6 April 2024) in which case the deduction is 100% of the value of benefits paid.

Overseas Transfer Allowance

The Overseas Transfer Allowance is reduced by 100% of the value of benefits you used under the Lifetime Allowance framework.

 

Under the lifetime allowance framework you would have had a benefits limit check at age 75. Unfortunately, even though no benefits were paid to you at that time the current legislation assumes that 25% of the value was paid as a tax-free lump sum and reduces your new allowances.

Government have acknowledged this was not the intention of legislation and are currently working on new legislation where the age 75 check will not reduce your allowances. This legislation is however still in draft and in our view requires further amendment before it becomes law so you may wish to apply for a Transitional Certificate (See Question 6) if you are impacted by the reduction.

An individual may ask any registered pension scheme they’re a member of to provide them with a Transitional Certificate.

The certificate will take into account the actual tax-free lump sums that have already been paid rather than an assumed amount based upon the lifetime allowance that’s been used up. Where the individual has died a request can be made by their legal personal representative to any scheme they were a member of.

When making an application you have to provide evidence of all benefits in payment and the actual tax-free cash amounts received. We will accept copies of benefit statements you received when taking benefits, provided they are on headed paper, but other providers may have additional requirements as to what evidence they require before they issue a certificate.

What will a Transitional Certificate look like?

A certificate can be in any form that a scheme administrator deems appropriate, including being part of another document issued at the same time. It must though as a minimum contain the following information:

• Your name, address and national insurance number
• The amount of your previously used lifetime allowance expressed as a percentage of the standard lifetime allowance 
• The total amount of Lump Sum Allowance used by benefits paid to you before 6 April 2024
• The total amount of Lump Sum and Death Benefit Allowance used by benefits paid to you before 6 April 2024

Once you receive a certificate you will need to provide a copy within 90 days to any other pension scheme administrator that you hold a pension with.

What you need to consider:

You’ll need to apply for a Transitional Certificate before you first take benefits after 6 April 2024. Once an application for a certificate has been made it cannot be withdrawn. It can however be cancelled by the issuing scheme administrator if it is proved to be incorrect.

Evidence you provide must be for all benefits in payment and confirm both the lifetime allowance used up at the time and the amount of any tax-free cash received.

You cannot apply for a Transitional certificate if the only benefit paid to you started before 6 April 2006.

We recommend you seek advice before any application is made as it can produce a lower maximum benefit in certain circumstances. We explain what that means in Question 8.

Your entitlement to more than 25% of the fund as a tax-free lump sum was protected in the same way as it was under the Lifetime Allowance framework.

What you need to consider: There is currently an error in the legislation. HMRC are aware of this and have proposed a fix. We and most other providers are making payments on our understanding of how the fix will work but you may find some providers who will not make payments until the legislation becomes law.

For most people the tax-free lump sum is unchanged. There are some situations where the maximum possible lump sum can be higher or lower than the Lifetime Allowance framework allowed. There are also some situations where the legislation is still incomplete. We'll go through some examples here so you can see what we mean.

What happens when benefits taken before 6 April 2024 paid less than 25% of funds as a Pension Commencement Lump Sum?

The Lifetime Allowance framework calculation for the maximum Pension Commencement Lump Sum was based on the total value of benefits you took. The new framework is based only on the Pension Commencement Lump Sum you’re assumed to have taken (25% of Lifetime Allowance used).
So, if you received less than the 25% of the Lifetime Allowance you could apply for the actual sum to be used in calculations.

For example: You used 60% of your Lifetime Allowance when taking pension benefits but didn’t receive any of the benefits as a tax-free lump sum.

Using the Standard method
60% of Lifetime Allowance used is £643,860
25% assumed to be paid tax-free is £160,965
Lump Sum Allowance remaining
(£268,275 – £160,965) = £107,310

Using the Alternative method
Application made to use the actual tax-free amount paid of £0 rather than the assumed amount of 25% of the fund.
Lump Sum Allowance remaining
(£268,275 – £0) = £268,275

What you need to consider: To use the Alternative method explained above you would need to apply for a Transitional Certificate that confirms the actual amount of tax-free cash you took (see Question 6) before any benefits are taken after 6 April 2024.

What happens if I've applied for a Transitional Certificate?

A Transitional Certificate will take into account the actual amount of the tax-free lump sum you were paid rather than assuming that you received 25% of the Lifetime Allowance used up. So, where you know you received less than 25% of the benefits as a tax-free lump sum from a pension scheme you would think you should apply for a Transitional Certificate.
But it’s not that straightforward and the way the rules have been written you could be worse off if you make an application. And once you’ve applied you can’t change your mind.

What if I took less than 25% tax-free cash but it was more than £268,275

The examples below show what happened if someone took benefits valued at £1.2m (66.66%) when the Lifetime Allowance was £1.8m and £270,000 (22.5%) was paid as tax-free cash.

Using the old method:
66.66% of Lifetime Allowance used is £715,328 
Lifetime Allowance remaining is £357,772
25% allowed tax-free is £89,443

Using the new Standard method:
66.66% of Lifetime Allowance used is £715,328
25% assumed to be paid tax-free is £178,832
Lump Sum Allowance that remains (£268,275 – £178,832)
= £89,443

Using the new Alternative method:
An application is made to use the actual tax-free amount paid
of £270,000 rather than the assumed amount of 25% of the fund.
Lump Sum Allowance that remains (£268,275 – £270,000)
= £0

Even though you’ve taken less than 25% of the fund as a tax-free lump sum if you apply to use the alternative method your tax-free benefits would be less. This means you could pay more in tax.

What happens when you take benefits after age 75?

The examples below show what happens if someone has gone past age 75 and has no Lifetime Allowance Protection.
In these examples, they reached 75 on 1 January 2024 and started taking benefits of £1,000 per month tax-free cash with £3,000 per month as taxable income. They have received 8 monthly payments (£32,000) up to August 2024.

They have a remaining pension valued at £ 920,000 that was subject to an age 75 lifetime allowance check when the value was £940,000 (87.59%) and the lifetime allowance was £1,073,100.

Using the old method:
Age 75 lifetime allowance used is ignored
Lifetime allowance remaining is £1,073,100
Deduction for benefits taken after age 75 £32,000
Maximum tax-free cash is 25% of lifetime allowance remaining £260,275

Using the new Standard method:
Age 75 lifetime allowance cannot be ignored because took benefits after reaching 75
87.59% of lifetime allowance used is £939,928
25% assumed to be paid tax-free is £234,982

Lump Sum Allowance remaining (£268,275 - £ 234,982) £33,293

Using the new Alternative method:
An application cannot be made for the alternative method because benefits have been paid after 6 April 2024.
If an application was allowed then the deduction would only be the actual tax-free amounts paid of £8,000 and not the assumed amount of 25% of fund.

What you need to consider: As currently drafted legislation can significantly reduce the tax-free cash that is available to someone over age 75. This was not the intention of legislation and HMRC are working to fix this.
We strongly recommend you seek advice if looking to take benefits after age 75 as you may be impacted by the unintended restrictions in the current legislation.

As there is no Lifetime Allowance test you can now pay contributions into a pension, join a new pension arrangement or transfer benefits to a new pension scheme without losing your protection. But you can only do this if your certificate shows you applied for protection before 15 March 2023.

9A: What if I applied for Fixed Protection after 15 March 2023?

You can apply for Fixed Protection 2016 until 5 April 2025. Unlike an application submitted before 15 March 2023, the protection will be cancelled if contributions are paid in or you join a new pension scheme. It won’t be cancelled if you’re joining a new pension scheme just to receive an authorised transfer.
 

HMRC agreed to maintain the same approach for taxing death benefits.

That means any lump sum payable on the death of a policyholder can be paid out without checks against the available allowance. It’s the responsibility of the legal personal representative to decide if the available allowance has been exceeded and how much is subject to tax.

The actual tax charge is paid by the person who receives the benefit, and the amount will depend upon their personal circumstances as it’s treated as taxable income. Where there are multiple beneficiaries, the legal personal representative must decide who is responsible for the tax that is due.

What you need to consider: For death benefit cases tax is due on all benefits paid after death of a member over age 75. If a person dies who’s under age 75 tax is only due on any lump sum over the Lump Sum and Death Benefits Allowance unless benefits are not paid within 2 years in which case all benefits paid are taxable.

This means there is a big difference in the tax treatment of benefits where a member died before age 75 between a cash lump sum being taken and when a pension income is taken either as a one-off income or as a regular income.

For example: If a member dies at age 67 with £2.0m fund. The maximum lump sum that can be paid tax-free is £1,073,100 with any amount above that being taxed at a marginal rate for that person. But if the £2.0m was paid as income instead the whole amount would be tax-free.
 

10A: What about death benefits that come from an income drawdown fund?

If a person dies under the age of 75 and has pension funds held as income drawdown from before 6 April 2024 then any lump sum paid from these funds will not count towards the lump sum and death benefit allowance. This is because these funds will have already been tested against the lifetime allowance limit that was in place before 6 April 2024.

Lump sums paid from income drawdown funds that started after 6 April 2024 will count towards the lump sum and death benefit allowance.

Where income tax is payable, it is the person receiving the benefit who gets taxed at their marginal rate of income.
So, on retirement or serious ill-health, it would be the policyholder/member and for a death claim, it would be the beneficiary.
 

Where there are multiple recipients of death benefits it is the responsibility of the legal personal representative to allocate payments and determine which payments are taxable and which are not.
 

We cannot say what changes, if any, will be made in the future following the change in Government. If changes are made in the future, we’ll provide guidance at that time.

Unfortunately there are still some areas of legislation that are unclear and need more explanation and some that HMRC have acknowledged are wrong and need changing.

As you’ll understand, it takes time to update all the regular communications we send to you where there have been big changes like this one. We appreciate your patience while we make those changes. We’d suggest when you read any information about the Lifetime Allowance in the meantime take it as if it continues after 6 April 2024.

This is because the new allowances are intended to only impact the same people who were impacted by the lifetime allowance limits.

If you have Enhanced Protection with a protected Pension Commencement Lump Sum then you get a Lump Sum Allowance for each pension scheme which is the maximum that could have been paid out on 5 April 2023.

However, for both Lump Sum and Death Benefits Allowance and Overseas Transfer Allowance your maximum is the amount that you could have been paid on 5 April 2024.

Case Study - Mark has Enhanced Protection with protected lump sum rights at 30%.

On 5 April 2023 Mark held the following uncrystallised pensions:

• Personal Pension valued at £500,000
• SIPP valued at £1,000,000

In October 2023 Mark’s employer contributes £50,000 into his Personal Pension.

In December 2023 Mark crystallised £200,000 from his SIPP to pay £60,000 tax free cash and move £140,000 into drawdown.

On 5 April 2024, the uncrystallised values had changed to:

• Personal Pension is £600,000
• SIPP is £850,000

For the Personal Pension:

• The tax-free cash is £150,000 being 30% of the value at 5 April 2023
• The lump sum death benefit is £600,000 being the value at 5 April 2024

For the SIPP:

• The tax-free cash is £240,000 being 30% of the value at 5 April 2023 minus the tax-free lump sum of £60,000 paid since that date
• The lump sum death benefit is £850,000 being the value at 5 April 2024

If you have Enhanced Protection without tax-free cash protection then your Lump Sum Allowance is not calculated for each arrangement, but is instead normally the lower of 25% of the value being taken, or The maximum lump sum allowance of £375,000 less:

• Any tax-free cash taken after 6 April 2024 and
• 25% of the lifetime allowance previously used amount

If however an application has been made for a ‘transitional tax-free amount certificate’ then you deduct the value of the lump sum shown on the certificate instead of calculating 25% of the value as shown above.

The calculation for the ‘lifetime allowance previously used amount’ has caused HMRC some problems and some of the legislation is in fact still outstanding. It is however our understanding that final legislation will reflect how the lifetime allowance was calculated immediately before 6 April 2024.

That means you do not compare the percentage of lifetime allowance used against the final lifetime allowance of £1,073,100 but instead follow the pre-6 April 2024 calculation method to work out the value of the previously used amount as follows:
Step 1. Identify value of each previous benefit already taken If actual value is not known then HMRC have agreed you can use the percentage of lifetime allowance used as applied to the lifetime allowance at the time the benefit was taken
Step 2. Adjust each previous benefit value using the formula CSLA/PSLA

• CSLA is £1.5m
• PSLA is the greater of:
  Standard Lifetime Allowance when the benefit event occurred, or
  £1.5m

Case Study - Asha used 20% of her LTA in July 2008 ( LTA was £1.65m), then used 35% of her LTA in January 2021 (LTA was £1.0731m). You determine the lifetime allowance previously used amount as follows:

• 20% of £1.65m = £330,000 x £1.5m/£1.65m = £300,000
• 35% of £1,0731m = £375,585 x £1.5m/£1.5m = £375,585
  25% of £675,585 = £168,896.25

Available Lump Sum Allowance = £375,000 - £168,896.25 = £206,103.75

When applying for primary protection, tax-free cash rights could also be registered for protection if the total value of tax-free cash rights (including those already taken) exceeded £375,000 on 5 April 2006. This will be shown on your certificate from HMRC as a monetary amount if you have it.

Since the changes on 6 April 2024 any individual with primary protection and tax-free cash protection will have a personal Lump Sum allowance of:

• The protected tax-free cash on the certificate multiplied by 1.2,
  LESS
• Any tax-free cash taken since 6 April 2012, and
• Any tax-free cash taken between 6 April 2006 and 5 April 2012 increased to allow for changes in the lifetime allowance by £1.8M/the standard LTA at the time the tax-free cash was taken

Case Study - Brian had pension rights valued at £2.4m on 5 April 2006, with tax-free entitlement of £750,000. He registered for primary protection.

Brian took £100,000 tax-free cash in August 2008, then took £150,000 tax free cash in January 2019 so his available LSA is calculated as:

• Protected amount £750,000 x 1.2 = £900,000
• Deduction for August 2008 benefit £100,000 x £1.8m/£1.65m = £109,090.90
• Deduction for January 2019 benefit £150,000

£900,000 - £109,090.90 - £150,000 = £640,909.10

If no tax-free cash rights were registered, then the maximum tax-free cash available when crystallising benefits will normally be the lower of:

• 25% of the crystallised value of the benefits being taken, and
• £375,000 less:
  Any tax-free cash taken from 6 April 2024
  25% of any pre-commencement benefits taken before 6 April 2006
  25% of the ‘lifetime allowance previously used amount’ capped at a maximum of £375,000

If however an application has been made for a ‘transitional tax-free amount certificate’ then you deduct the value of the lump sum shown on the certificate instead of calculating 25% of the value as shown above.

What you need to consider:

The calculation for the ‘lifetime allowance previously used amount’ has caused HMRC some problems for people with primary protection and some of the legislation is in fact still outstanding. It is however our understanding that final legislation will reflect how the lifetime allowance was calculated immediately before 6 April 2024.

That means you do not compare the percentage of lifetime allowance used against the final lifetime allowance of £1,073,100 but instead follow the pre-6 April 2024 calculation method to work out the value of the previously used amount as follows:
Step 1. Identify value of each previous benefit already taken If actual value is not known then HMRC have agreed you can use the percentage of lifetime allowance used as applied to the lifetime allowance at the time the benefit was taken
Step 2. Adjust each previous benefit value using the formula CSLA/PSLA

• CSLA is £1.5m
• PSLA is the greater of:
  Standard Lifetime Allowance when the benefit event occurred, or
  £1.5m

Case Study - Christina used 40% of her LTA in January 2012 ( LTA was £1.8m), then used 40% of her LTA in January 2024 (LTA was £1.0731m). You determine the lifetime allowance previously used amount as follows:

• 40% of £1.8m = £720,000 x £1.5m/£1.8m = £600,000
• 40% of £1,073,100 = £429,240 x £1.5m/£1.5m = £429,240
• 25% of £1,029,240 = £257,310

Available Lump Sum Allowance = £375,000 - £257,310 = £117,690