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 £1.0731m. The LSDBA is £1.0731m 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 transitional 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
Age 75 benefit crystallisation events
Transitional tax-free amount certificate (TTFAC)
How to apply for a TTFAC
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. Whether a BCE 5, 5A or 5B are included in the standard calculation depends on whether the client has taken any tax-free cash between age 75 and 5 April 2024.

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, uncrystallised fund lump sum death benefit or defined benefit lump sum death benefit, or
25% of the lifetime allowance in any other circumstances.

In most cases, if someone has already used up all of 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 final lifetime allowance (£1,073,100), unless a client has a form of transitional protection (see below), and 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.

Age 75 benefit crystallisation events

Where someone turned 75 between 6 April 2006 and 5 April 2024 the pension will have been valued against the lifetime allowance as either a BCE 5, 5A or 5B. Whether or not these BCEs are included in the standard calculation depends on whether the client has taken any tax-free cash between age 75 and 5 April 2024.

If no tax-free cash has been taken between age 75 and 5 April 2024, then BCE 5, 5A and 5B won’t be included in the standard calculation. But if the client has taken any tax-free lump sums in that period, then the full amount of the BCE will be included in the standard calculation.

Due to this, some clients may find their available LSA is restricted as a result of benefits tested at age 75. Such clients may therefore need to apply for a transitional tax-free amount certificate to maximise the amount of tax-free cash they can take.

Clients that turned 75 after 5 April 2024 won’t have their LSA reduced as a result of turning age 75.

Transitional tax-free amount certificate (TTFAC)

If someone has evidence to show what, if any, tax-free benefits they received between 6 April 2006 and 5 April 2024, they may choose to apply for a transitional tax-free amount certificate (TTFAC). The certificate confirms the clients ‘lump sum transitional tax-free amount’ and their ‘lump sum and death benefit transitional tax-free amount’. Both figures show the amount of tax-free lump sums a client has previously received (not the amount of the allowance they have remaining). These figures must be used instead of applying the standard approach shown above.

The lump sum transitional tax-free amount includes the tax-free amount of:

Pension commencement lump sums
Uncrystallised funds pension lump sums
Stand-alone lump sums

The lump sum and death benefit transitional tax-free amount includes the tax-free amount of:

Each relevant lump sum
Each relevant lump sum death benefit

If a client has a pension in payment setup before 6 April 2006, 25% of the amount of the deemed BCE is included in both the lump sum transitional tax-free amount and the lump sum and death benefit transitional tax-free amount.

How to apply for a TTFAC

To obtain a TTFAC an individual needs to apply after 6 April 2024 to a pension scheme where they have unused benefits. Applications may not be made:

After a client becomes entitled to any RBCE, or
After the 31 October following the end of the tax year in which a relevant lump sum death benefit has been paid in respect of a deceased individual

Following a client’s death, their legal personal representative can apply for a TTFAC to provide an increased LSDBA considering the actual tax-free lump sums the client received.

Sufficient evidence needs to be provided so the scheme administrator can clearly see what benefits have been taken. In particular tax-free lump sums along with the BCE certificates for those events need to be provided, to allow the scheme administrator to determine the available allowances and provide a 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 TTFAC.

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

Clients that receive a TTFAC must provide copies to all their pension scheme administrators within 90 days of receiving the certificate.

A TTFAC may be cancelled by the scheme that provided it if it turns out the TTFAC was inaccurate. Any payment that was made tax-free on reliance of a transitional tax-free amount certificate which turns out to be incorrect, is still an authorised member payment and becomes liable to income tax in the year of payment as pension income.

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 on 5 April 2006. Where a client had entitlement to take all of their pension on 5 April 2006, they retain the ability to take a stand-alone lump sum.

When paying scheme-specific tax-free cash or a stand-alone lump sum, a clients LSA is not reduced by the amount of the tax-free lump sum paid. Instead, the LSA is reduced by 25% of the total pension value used. The LSDBA is reduced by the amount of the tax-free lump sum paid.

Clients with either enhanced protection or primary protection, with protected tax-free rights in excess of £375,000 are not able to claim scheme specific tax-free cash. Separate rules control the amount of tax free cash available, see our pages on enhanced protection or primary protection for more information.

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