Lump Sum Allowance and Lump Sum and Death Benefit Allowance

Introduction

This briefing sets out the upper limits that apply from 6 April 2024, to tax-free lump sums that can be paid from pensions on drawing retirement benefits, ill-health and on death.

Core considerations

Two allowances apply from 6 April 2024 replacing the previous Lifetime Allowance. These are the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA).
The LSA and LSDBA have been set with reference to the last standard Lifetime Allowance of £1.073m. The LSDBA is £1.073m and the LSA is 25% of that amount (£268,275).
An individual needs remaining LSA and LSDBA to pay a pension commencement lump sum (PCLS) or uncrystallised funds pension lump sum (UFPLS). Remaining LSDBA only is needed to pay tax-free death benefits or a serious ill-health lump sum.
An individual’s LSA or LSDBA can be higher than the standard amounts if they have lifetime allowance protection in place.
An individual’s LSA or LSDBA will be reduced by any BCE between 6 April 2006 and 5 April 2024.
To calculate the limit which applies when benefits are paid out, any previous relevant lump sums must be deducted from the LSA or LSDBA to determine the remaining allowance.
The LSA and LSDBA apply to tax-free lump sums, any of these lump sums that exceed the remaining allowance is subject to income tax.

How the LSA works
How the LSDBA works
Benefits not tested against the LSA and/or the LSDBA
Benefits crystallised pre-6 April 2024
Transitional tax-free amount certificate
Transitional protections
Scheme specific tax-free cash and the LSA and LSDBA

How the Lump Sum Allowance works

Individuals will have a lump sum allowance of £268,275. This caps the tax-free lump sums an individual can take unless they have a protected right to a higher amount or qualify for a serious ill health lump sum. See below for details of the LSA where the different lifetime allowance protections apply.

The following lump sums use up the LSA, reducing the available allowance for subsequent events. These are known as relevant benefit crystallisation events (RBCEs):

Pension commencement lump sum
Tax-free element in relation to an Uncrystallised Funds Pension Lump Sum (UFPLS).
Stand-alone lump sum

These lump sums must be checked against the available LSA to remain tax free. Any excess above the LSA will be subject to income tax at the individual’s marginal rate.

The maximum pension commencement lump sum available from any pension is still limited, in most cases, to the lower of:

25% of the pension value being crystallised,
the available LSA, or
the available LSDBA.

How the Lump Sum and Death Benefit Allowance works

Individuals will have a lump sum and death benefit allowance of £1,073,100, this caps the tax-free lump sums that can be paid during an individual’s lifetime and on their death, unless they have a protected right to a higher amount. See below for details of the LSDBA where the different lifetime allowance protections apply.

The following lump sums use up the LSDBA, reducing the available allowance for subsequent events. These are the RBCEs for the LSDBA:

Pension commencement lump sum.
Tax-free element in relation to an Uncrystallised Funds Pension Lump Sum (UFPLS).
Stand-alone lump sum.
Serious ill health lump sums paid before age 75.
Relevant lump sum death benefits paid before age 75.

Any of these lump sums must be checked against the available LSDBA to remain tax free. Any excess above the LSDBA will be subject to income tax at the individual’s marginal rate. Lump sum death benefits in excess will be taxed at the beneficiary’s marginal rate.

Benefits not tested against the LSA and/or the LSDBA

Only tax-free lump sums use up the LSA or the LSDBA, though having available LSA remains relevant in some cases as shown below. There are some lump sums that are not tested against the LSA or the LSDBA and have a specific tax treatment.

No LSDBA check:

Trivial commutation lump sum death benefit
Charity lump sum death benefit

No LSA check, although some available LSA is required (note the available LSA can be less than the lump sum being paid):

Trivial commutation lump sum
Winding up lump sum

No LSA or LSDBA check (both allowances can be fully used):

Small lump sum payment (under £10,000)

Benefits crystallised pre-April 2024

If an individual has had any BCEs prior to 6 April 2024 these events will reduce the available LSA and LSDBA.

For the LSA, the standard approach is to deduct 25% of the lifetime allowance previously used from the individual’s LSA.

For the LSDBA, the standard approach is to reduce the LSDBA by the appropriate percentage, which is:

100% of any serious ill health lump sums and death benefit lump sums, or
25% of the lifetime allowance in any other circumstances.

If an individual has already used up their lifetime allowance, then the LSA and LSDBA will be nil, which would mean no further tax-free lump sums would be available.

The previously taken benefits are calculated by reference to the last lifetime allowance (£1,073,100), not the lifetime allowance at the time the benefits were taken.

Example

Michael took benefits equal to 55% of his lifetime allowance from a previous employer’s pension scheme in 2021, including a pension commencement lump sum (PCLS).

Michael now wants to take £400,000 from his money purchase pension. This could generate a pension commencement lump sum of £100,000 (25% of £400,000). Michael’s remaining LSA is £268,275 minus the previously taken PCLS.

The calculation for the previously taken PCLS is:

£1,073,100 x 0.55 x 0.25 = £147,551.25

So, Michael’s remaining LSA is:

£268,275 - £147,551.25 = £120,723.75

This is more than the PCLS Michael can take from his scheme (£100,000) so the £100,000 can be paid to Michael without restriction by the LSA. Remember that Michael also needs remaining LSDBA to take this PCLS. Michael would then have a remaining LSA of £20,723.75 for any further pension benefits.

Where clients have not taken the maximum tax-free lump sums available at previous BCEs, rather than using the standard approach above, they may be entitled to additional tax-free lump sums by applying for a transitional tax-free amount certificate.

Transitional tax-free amount certificate

If someone has evidence to show what, if any, tax-free benefits they received prior to 6 April 2024, they may choose to apply for a transitional tax-free amount certificate. The certificate confirms a ‘lump sum transitional tax-free amount’ and their ‘lump sum and death benefit transitional tax-free amount’, which are revised allowances to be used instead of applying the standard approach shown above.

To obtain a transitional tax-free amount certificate an individual needs to apply to a pension scheme after 6 April 2024 before they have any RBCE.

Sufficient evidence needs to be provided so the scheme administrator can clearly see what benefits have been taken, in particular tax-free lump sums, to allow them to determine the available allowances and provide a certificate.

Schemes have up to three months to provide a transitional tax-free amount certificate.

Individuals whose only pensions in payment are pre-commencement pensions (pre 6 April 2006) and have had no BCEs between 6 April 2006 and 5 April 2024, cannot apply for a transitional tax-free amount certificate.

Transitional protections

Where an individual has a lifetime allowance protection in place, the starting point for their LSA and LSDBA will be higher. Details of this starting point are as follows:

Type of protection	Lump sum allowance	Lump sum and death benefit allowance
Enhanced protection with no protected tax-free cash	£375,000	Value of uncrystallised funds on 5 April 2024
Enhanced protection with protected tax-free cash	For each arrangement, the maximum PCLS available on 5 April 2023 based on the protected percentage.	Value of uncrystallised funds on 5 April 2024
Primary protection with no protected tax-free cash	£375,000	£1.8m multiplied by their primary protection factor
Primary protection with protected tax-free cash	1.2 x the lump sum rights on the protection certificate – PCLS already taken.	£1.8m multiplied by their primary protection factor
Fixed Protection 2012	£450,000	£1,800,000
Fixed Protection 2014	£375,000	£1,500,000
Fixed Protection 2016	£312,500	£1,250,000
Individual Protection 2014	25% of the LTA on the Protection Certificate (£312,500 - £375,000)	Based on certificate (£1,2500,000 - £1,500,000)
Individual Protection 2016	25% of the LTA on the Protection Certificate (£268,275 - £312,500)	Based on certificate (£1,000,000 - £1,250,000)

As with the standard LSA, any previously used amounts and pre 6 April 2024 BCEs must be deducted from these starting amounts.

Scheme specific tax-free cash and the LSA and LSDBA

Scheme specific tax-free cash is available where an individual had an entitlement to a tax-free cash lump sum greater than 25% of their occupational pension scheme at 5 April 2006. The entitlement available on 5 April 2006 is protected and revalued until the benefits are taken.

HMRC have confirmed the calculation for scheme specific tax-free cash will be simplified from 6 April 2024, however the regulations are still in development.

Where someone was entitled to take 100% of their pension as a tax-free lump sum at 5 April 2006 this protection can be maintained and paid as a stand-alone lump sum, instead of a pension commencement lump sum. The maximum that can be paid tax free as part of a stand-alone lump sum is limited to the maximum that could have been paid on 5 April 2023. Any excess above this amount is taxable as income.

HMRC are introducing legislation to confirm that when clients take scheme specific tax-free cash or a stand-alone lump sum, 25% of the pension value is deducted from the LSA (instead of the amount paid tax free), but the full tax-free value paid will be deducted from the LSDBA.

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