This guide is for financial advisers only. It must not be distributed to, or relied on by, customers. The information on this page is based on our understanding of legislation as at CHANGE DATE.
Background
The lifetime allowance (LTA) was abolished from 6 April 2024. In its place, two new allowances have been introduced, namely the lump sum allowance (LSA) and the lump sum and death benefits allowance (LSDBA). There is an additional allowance for some transfers from overseas schemes, which is covered in our separate guide.
This technical guide covers:
- the lump sum allowance,
- the lump sum and death benefit allowance,
- the transitional arrangements ,
- relevant benefit crystallisation events, and
- how protections and enhancement factors affect the lump sum allowance and the lump sum and death benefit allowance.
Abbreviations
HMRC: HM Revenue & Customs
LSA: Lump Sum Allowance
LSDBA: Lump Sum Death Benefit Allowance
PCELS: Pension Commencement Excess Lump Sum
RBCE: Relevant Benefit Crystallisation Event
SIHLS: Serious Ill-health Lump Sum
LPR: Legal Personal Representatives
LSDB: Lump Sum Death Benefit
LTA: Lifetime Allowance
PCLS: Pension Commencement Lump Sum
SALS: Stand-alone Lump Sum
UFPLS: Uncrystallised Funds Pension Lump Sum
From 6 April 2024, individuals will have an LSA of £268,275, unless they hold valid LTA protection which results in a higher LSA. Note, there is no mechanism within the legislation to increase the LSA, so any future change would have to be legislated for.
An individual's LSA is reduced by each RBCE that takes place on or after 6 April 2024. For the purposes of the LSA, an RBCE occurs when one of the following ‘relevant lump sum’ payments is made:
- a PCLS
- a UFPLS
- an SALS.
Each time an entitlement to a PCLS or UFPLS arises the value of the individual’s LSA will be reduced by the monetary amount of the relevant tax-free payment. So the LSA will be reduced by the full amount of any PCLS paid, but only by the tax-free element of a UFPLS.
For example, if an individual who has never received a lump sum payment from a pension scheme receives a PCLS of £50,000, their LSA will be reduced from £268,275 to £218,275. If, instead, a UFPLS of £50,000 was paid, the LSA would be reduced by the tax-free element - the LSA would be reduced by £12,500, to £255,775.
An important point note is that where an individual exercises a right to take more than 25% tax-free cash (i.e. where they have tax-free cash protection), the LSA is only reduced by 25% of the total crystallised value, rather than the full monetary amount of the tax-free cash paid. However, where the payment is a SALS, the reduction depends on the circumstances - see the next paragraph for details.
The tax-free treatment of a SALS differs depending upon whether the entitlement arises because the member:
- holds primary protection with protection of lump sum rights in excess of £375,000 but does not hold enhanced protection with protection of lump sum rights,
- holds enhanced protection with protection of lump sum rights in excess of £375,000,
- was entitled on 5 April 2006 to take all of their benefits in an occupational pension scheme or section 32/deferred annuity contract as a tax-free lump sum.
For 1 and 2, the LSA is reduced by the full amount of the SALS, whilst for 3, the LSA is reduced by 25% of the lump sum paid.
When an RBCE occurs, the tax-free amount is subject to the limits set out in this table:
Lump sum payment |
Maximum tax-free payment |
|---|---|
PCLS |
The lower of;
|
UFPLS
|
The lower of;
|
SALS - where the member doesn't hold enhanced protection but does hold primary protection with protection of lump rights of more than £375,000 |
The lower of;
|
SALS where the member holds enhanced protection with protection of lump rights of more than £375,000 |
The maximum SALS that could have been paid to the individual tax free on 5 April 2023, less the aggregate of any SALS or PCLS amounts paid after this date.
|
SALS where, on 5 April 2006, the member's maximum lump sum entitlement under an occupational pension scheme or deferred annuity is equal to the value of their benefits in the scheme. |
The lower of:
|
Where the amount of the tax-free payment that could normally be paid is greater than the individual’s remaining LSA or LSDBA the tax-free amount is limited to the lower of the remaining LSA and the remaining LSDBA. The remainder of the payment is subject to income tax. This doesn't apply to PCLS payments, as the maximum PCLS payable is limited to the lower of the remaining LSA and the remaining LSDBA. Once either the LSA or the LSDBA has been reduced to nil no further PCLS can be paid. However, it may be possible to pay the excess as a UFPLS or a PCELS. The full amount of such payments is subject to income tax at the recipient's marginal rate.
Where two or more RBCEs occur on the same day, the order in which they are to be tested against the LSA is decided by the individual. This will determine which scheme, if any, is responsible for accounting for any tax due and for meeting any HMRC reporting requirements.
In addition to the LSA, individuals will also have an LSDBA. The LSDBA is set at £1,073,100 from 6 April 2024 and as with the LSA, the legislation does not include any mechanism to increase this limit in the future. An individual may be entitled to a higher LSDBA if they hold valid LTA protection.
The LSDBA is reduced each time an RBCE occurs. The definition of an RBCE in relation to the LSDBA differs from the definition used in respect of the LSA. In the context of the LSDBA an RBCE means any relevant lump sum or any relevant lump sum death benefit.
During an individual’s lifetime their LSDBA is reduced by the following relevant lump sums:
- PCLS*,
- SALS,
- SIHLS, and
- the tax-free element of any UFPLS.
* Where an individual exercises a right to take more than 25% tax-free cash (i.e. they have tax-free cash protection), the full amount of the tax-free cash paid reduces their available LSDBA.
On death, any authorised lump sum death benefit paid is treated as a relevant lump sum death benefit, with the exception of:
- a charity lump sum death benefit lump, or
- a trivial commutation lump sum death benefit.
You can read more about these two lump sums in parts 1 and 8 of our death benefits guide.
The payment of an LSDB from benefits that were crystallised before 6 April 2024 doesn't reduc the LSDBA. HMRC have said this is because the crystallised benefits have already been tested against the LTA.
The tax-free amount of each relevant LSDB counts towards the LSDBA where the member was aged under 75 at the time of death and the lump sum is paid within two years of the date the scheme administrator was first notified or became aware of the death of the member.
The taxation of payments made where the member was aged 75 or over when they died, or those paid more than two years after the scheme administrator should have first been aware of the member’s death, will not change - these remain taxable. See the table below for a breakdown of how each LSDB is treated for tax purposes from 6 April 2024, depending upon the circumstances that apply at the time of death.
LSDB |
Member dies on, or after, 75 |
Settled more than two years from notification |
Dies under 75, settled within two years |
|---|---|---|---|
Uncrystallised funds LSDB |
Full amount subject to income tax if paid to a qualifying person.. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Tax free if within member’s remaining LSDBA. Any amount that exceeds the member’s remaining LSDBA is subject to income tax.* |
Drawdown pension fund LSDB |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Tax free if within member’s remaining LSDBA. Any amount that exceeds the remaining LSDBA is subject to income tax.*
|
Flexi access drawdown LSDB |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Tax free if within member’s remaining LSDBA. Any amount that exceeds the remaining LSDBA is subject to income tax.* |
Annuity protection LSDB |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Not applicable – no ‘two-year rule’. |
Tax free if within member’s remaining LSDBA. Any amount that exceeds the member’s remaining LSDBA is subject to income tax.* |
Defined Benefit LSDB |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Tax free if within member’s remaining LSDBA. Any amount that exceeds the member’s remaining LSDBA is subject to income tax.* |
Pension Protection LSDB |
Full amount subject to income tax if paid to a qualifying person. Full amount subject to the special lump sum death benefits charge if paid to a non-qualifying person. |
Not applicable – no ‘two-year rule’ |
Tax free if within member’s remaining LSDBA. Any amount that exceeds the member’s remaining LSDBA is subject to income tax.* |
* The lump sum is paid by the scheme administrator without deducting income tax.
Read our death benefits guide for more information about qualifying and non-qualifying persons.
Once the LSDBA has been reduced to nil, a`ny subsequent relevant lump sums (except a PCLS, which can’t be paid once the LSDBA is nil) or relevant lump sum death benefits will be subject to income tax at the marginal rate of the recipient. Where income tax is due following the payment of a relevant LSDB, it's the responsibility of the legal personal representatives to notify HMRC that tax is due and HMRC will then notify the beneficiaries of their liability to income tax.
Where a dependant inherits a member’s drawdown fund, or a dependant, nominee or successor inherits a member’s flexi-access drawdown fund, any lump sum paid on the death of the dependant, nominee or successor will count towards their own LSDBA rather than the LSDBA of the original member or the recipient of the lump sum. Also, it’s the age and date of death of the dependent, nominee or successor that determines the tax treatment of any LSDB being paid. Any tax-free lump sum death benefit that exceeds the dependent’s, nominee’s or successor’s remaining LSDBA will be taxable. You can read more about this in our death benefits guide.
Where more than one RBCE occurs in relation to the payment of LSDBs in respect of an individual, they are to be treated for the purposes of the LSDBA as occurring:
- immediately prior to the individual’s death,
- immediately after the payment of any PCLS to which the individual becomes entitled immediately before death, and
- in such order as may be decided by the LPR.
Therefore, where there are multiple LSDB payments, it will be for the LPR to decide the order in which the payments are made which will in turn determine which payments are subject to income tax once the LSDBA is exhausted.