Lump Sum Allowances
Frequently asked questions
The Government removed the lifetime allowance from 6 April 2024. It also approved legislation introducing three new lump sum allowances that together cap tax-free benefits at the same level as the Lifetime Allowance did. There are however some minor differences and new jargon so this document will help to answer some of the questions you might have about it.
The questions and answers are based on our understanding of the regulations at 01/05/2025. We strongly recommend that if you are in any doubt about the impact of the changes on your benefits that you seek specialist advice.
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The lifetime allowance was a limit on how much could be saved into a pension during your lifetime before additional tax charges were applied. The Government removed the lifetime allowance from 6 April 2024.
What is the impact on my Pension Benefits?
Since 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 did though introduce three new lump sum allowances. Between them, they act to limit the tax-free benefits from a pension in a similar way that the lifetime allowance framework did.
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Lump Sum Allowance – This is the maximum amount of tax-free lump sum that can be paid from all of your pensions. For most people, the limit is £268,275. This 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 age 75. It is also the maximum serious ill health lump sum for people with a life expectancy of less than one year.
For most people, the maximum is £1,073,100. This is again the same amount that could have been paid under the lifetime allowance framework (it’s 100% of 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. For most people, the maximum is £1,073,100 this is the same amount that could have been transferred without a tax charge under the lifetime allowance framework (it’s 100% of lifetime allowance amount which was £1,073,100).What you need to consider:
In the same way as the lifetime allowance worked, each of the three new allowances reduces each time pension benefits are taken. For lump sum allowance and lump sum and death benefit allowance, it is taking tax free benefits that reduces the allowance. For the overseas transfer allowance, it is making an overseas transfer that reduces the allowance.
All three allowances are also reduced by the value of any benefits taken before 6th April 2024 when the new rules started -
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 tax-free 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 Lifetime 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%) this 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 you need to consider:
For someone with enhanced protection, the allowances are based upon the value of pension benefits not yet in payment at dates set by legislation. As a result, allowances can be lower than the default amounts shown in Question 2.
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 lifetime allowance 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) this 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.
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Each of your new personal Lump Sum Allowances is 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. There are two methods 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:Types of protection Lifetime allowance previously used amount calculation Remaining lump sum allowance No transitional protection 25% x (80%x £1.0731m) = £214,620 £268,275 - £214,620 = £53,655 Fixed protection 2012 25% x (80%x £1.8m) = £360,000 £450,000 - £360,000 = £90,000 Fixed protection 2014 25% x (80%x £1.5m) = £300,000 £375,000 - £300,000 = £75,000 Fixed protection 2016 25% x (80%x £1.25m) = £250,000 £312,500 - £250,000 = £62,500 Individual protection 2014 (certificate confirms £1.35m) 25% x (80%x £1.35m) = £270,000 £337,500 - £270,000 = £67,500 Individual protection 2016 (certificate confirms £1.1m) 25% x (80%x £1.1m) = £220,000 £275,000 - £220,000 = £55,000 Enhanced Protection (certificate confirms 30%) No adjustment (See Section 16) 30% of the value of policy at 05/04/2023 Enhanced Protection (no cash protection) Deduction depends upon when benefits were taken (See Section 17) £375,000 – Amount calculated for 80% used Primary Protection (protected tax-free cash) Deduction depends upon when benefits were taken (See Section 18) Protected amount – Amount calculated for 80% used Primary Protection (no cash protection) Deduction depends upon when benefits were taken (see Section 19) £375,000 – Amount calculated for 80% used 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 Serious ill Health benefits paid.
Overseas Transfer Allowance
The Overseas Transfer Allowance was originally reduced by 100% of the value of benefits used under the old lifetime allowance framework. A change was made by HMRC in an update on 18th November 2024 to avoid double counting the drawdown benefits when transferring overseas.The reduction is now the value of benefits used under the old framework apart from those benefits that were used to provide income drawdown (Benefit Crystallisation Event 1 under legislation).
For example:
If the 80% used in the table above was made up of 20% tax-free cash and 60% income drawdown the Overseas Transfer Allowance for a person with no protection would be: £1,073,100 - £214,620 (60% used to provide drawdown is ignored) = £858,480
But if it was made up of 20% tax-free cash and 60% annuity purchase then the Overseas Transfer Allowance for a person with no protection would be: £1,073,100 -£858,48 (whole 80% used is counted) = £214,620 -
Under the lifetime allowance framework you were counted as having taken benefits at age 75 but these benefits were then ignored for the purpose of working out the tax-free cash available. Unfortunately, under the new legislation it is only if before 6 April 2024 and after you turned age 75 you did not take a tax-free lump sum that it is ignored.
If you have taken benefits after reaching age 75, then the value counted as being taken at age 75 is used to reduce the allowances you have available.For example: You were age 75 on 8 June 2022 and have a certificate saying you used up 50% of your lifetime allowance as a result.
If you have not taken a lump sum from any pension since 8 June 2022 then the 50% used up is ignored when working out your personal allowances.
But if you took a tax-free lump sum between 8 June 2022 and 6 April 2024 then there is a deduction from your personal allowances based upon the 50% assumed used up at age 75. This is regardless of what amount you actually took as a tax- free lump sum.
£1,073,100 x 50% = £ 536,550
For both Lump Sum Allowance and Lump Sum and Death Benefit Allowance the deduction assumed is 25% of the value (See Question 4).
25% of £536,550 = £ 134,137.50 deduction from your allowances.
You may wish to consider applying for a Transitional Certificate (See Question 6) if you are impacted by this change in approach to age 75.
What you need to consider: Choosing to take benefits from income drawdown does not count as a lump sum. This is the case even if you choose to take all your income drawdown fund as a single payment.
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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. Other providers may have different requirements for 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 shown as a percentage of the standard lifetime allowance
- The total amount of Lump Sum Allowance taken as benefits paid to you before 6 April 2024
- The total amount of Lump Sum and Death Benefit Allowance taken as 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.
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Your entitlement to more than 25% of the fund as a tax-free lump sum is protected in the same way as it was under thelifetime allowance framework.
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For most people the tax-free lump sum is unchanged. There are however some situations where the maximum possible lump sum can be higher or lower than the lifetime allowance framework allowed. 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 received. 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 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. This confirms the actual amount of tax-free cash you received (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 age 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 age 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 the fund.
What you need to consider: The legislation as it’s written now means that the tax-free cash that is available to someone over age 75, can be a lot less than it was before. Though this was not the intention of legislation, there is no indication that HMRC will make amendments to change 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 could 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.
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HMRC agreed to maintain the same approach for taxing death benefits.
That means on the death of a policyholder, any lump sum due can continue to be paid out by the pension provider without first checking the amount against the available allowance. This is because it remains the responsibility of the legal personal representative to decide how much, if any, of the lump sum payment goes above the available allowance.
When the legal personal representative checks the available allowance, it used to be the case that where more than one lump sum was being paid on death they could choose the order in which they were paid.
HMRC have however changed this so that each payment is now counted as happening at the same time. A small change but in practice, it means that the legal personal representative now has to split the available lump sum and death benefit allowance proportionately.
For example: An individual with lump sum and death benefit allowance of £ 1,073,100. Upon death, three pensions lump sums are paid out each of £500,000 for a total of £1,500,000.
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.Using the old method:
The legal personal representative would choose the order in which the lump sums were paid. The first 2 payments totalling £1,000,000 would be tax-free as they were both within the available allowance.
Only the last £500,000 would attract a tax charge as it would exceed the £73,100 of remaining allowance.
Using the new method:
The legal personal representative has to split the available allowance proportionately. In this example that proportion is 1/3rd for each payment which is £357,700. Each £500,000 payment now has an excess amount of £142,300 that is subject to a tax charge on the beneficiary.
What you need to consider:
For death benefit cases, tax is due on all benefits paid after the 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 to 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 one-off income or as a regular income.
For example: If a member dies 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.
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 6th 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 6th April 2024.
Lump sums paid from income drawdown funds that started after 6th 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.
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We cannot say what changes, if any, will be made in the future. If changes are made in the future, we’ll provide guidance at that time.
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Amended legislation was introduced on 18 November 2024 to address the majority of issues that HMRC had acknowledged were unintentional and so needed changing. It is unlikely that more changes will be made to legislation. There are still some areas of legislation that we consider are not operating as intended and we continue to talk to HMRC about them.
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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.
Whilst we have made the majority of the changes necessary we appreciate your patience as there are still some areas we have yet to fully complete. We’d suggest that if you see information about the lifetime allowance in the meantime, that you 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.
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It was not possible for us to make all the changes we wanted to our computer systems in time for the 2025 P60. As a result, information about how much of the new personal allowances you have used up is not shown in the 2025 P60.
We plan to include this missing information in time for the 2026 p60 but in the meantime will issue you with this information in a separate letter. If you need to know the value before we issue the information to you, please contact us.
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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
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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 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 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. 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 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
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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 lifetime allowance 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
- The protected tax-free cash on the certificate multiplied by 1.2,
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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 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. 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 lifetime allowance in January 2012 ( LTA was £1.8m), then used 40% of her lifetime allowance 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