Pension lump sum allowances

Lump Sum Allowance and Lump Sum and Death Benefit Allowance

The Lifetime Allowance was the total value of pension benefits you could build up throughout your lifetime and generally receive up to 25% tax-free. This limit was £1,073,100 for most people.

From 6 April 2024, the Lifetime Allowance was removed. This doesn’t mean there are no limits on the amount of pension savings people can take tax-free; the Lifetime Allowance is being replaced by new allowances that act similarly.

The new allowances:

• A Lump Sum Allowance limits the total tax-free lump sum that can be paid from all the pensions you have. The limit has been set at £268,275 for anyone without Lifetime Allowance protection. It’s the same limit that is applied under the Lifetime Allowance rules.


• A Lump Sum Death Benefit allowance limits the tax-free lump sum that can be paid from all pensions you have when you die. This limit has been set at £1,073,100 for anyone without Lifetime Allowance protection. It’s the same limit that is applied under the Lifetime Allowance rules.


• An Overseas Transfer allowance limits the maximum tax-free amount that can be transferred out of the UK. This limit has been set at £1,073,100 for anyone without Lifetime Allowance protection.
   

Unfortunately, not all the changes needed for this legislation were made by 6th April 2024. This will not impact most people looking to take benefits. HMRC are recommending not taking benefits in some specific scenarios.
These scenarios are, people who:

• Have enhanced protection and are looking to transfer to a new provider
• Have enhanced protection or primary protection and protected lump sum rights of more than £375,000
• Are looking to transfer overseas whose benefits are in income drawdown
• Are looking to transfer overseas who have a benefit in payment from before 06/04/2006 but no other benefits in payment
• Are entitled to a tax-free lump sum greater than 25% of their fund value

I have Lifetime Allowance protection. What are my allowances?

Each of the three new allowances will be adjusted so that it matches the value of the benefits you were allowed before the Lifetime Allowance was removed. If you have a pension scheme with a protected tax-free cash sum, this will also be considered when your personal allowances are calculated. 
 

What about pension benefits I have already taken?

In the same way that the Lifetime Allowance worked, the value of any pension benefits you’ve already taken will be deducted from your personal allowances, so you know what’s left.

Where you have taken benefits before 6th April 2024, we’ll treat you as if you’ve already taken 25% of your pension benefit in any Lump Sum Allowance calculations we work out.
 

What happens if I don't take my pension?

If you haven't taken your pension savings then when you die any lump sum paid above the lump sum and death benefit allowance will be subject to tax as earned income by your beneficiary(ies) under PAYE rules.

If the pension savings are paid as income to the beneficiary(ies) rather than as a lump sum then they will be tax free if you died before age 75 and the claim was settled within 2 years. If you died after age 75 or the claim was not settled inside 2 years then the income will be subject to tax as earned income by your beneficiary(ies) under PAYE rules.
 

What does this mean for me?

For most people, the new allowances being introduced will operate in the same way as the Lifetime Allowance did. For those with Lifetime Allowance protection there may be some impact and we would recommend you speak to your financial adviser or contact us for more information.