Find out the rules around Individual Lump Sum Allowances
Check what you need to do when taking lump sums so you know what's tax-free.
Overview
The Lifetime Allowance (LTA) charge was removed with effect from 6 April 2023. The LTA was then completely abolished from 6 April 2024. This removed the overall limit for individuals on tax-relievable pension savings.
From 6 April 2024, there is a limit on the total amount of lump sums and lump sum death benefits that you can receive free from income tax. These are the lump sum allowance and the lump sum and death benefit allowance.
For the 2023 to 2024 tax year, the standard lifetime allowance was £1,073,100. Read previous rates of standard lifetime allowance
If you had private pension savings above the lifetime allowance, the rate of tax you paid on the excess depended on:
- the type of payment you received (lump sum or pension payments)
- when you took your pension savings
If you took pension benefits above your available lifetime allowance before 6 April 2023, the rate was:
- 55% if you took a lump sum
- 25% plus your marginal rate of income tax if you took any other form of pension benefits, for example pension payments or cash withdrawals
If you took pension benefits above your available lifetime allowance on or after 6 April 2023, there was no lifetime allowance charge. But if you took a lump sum over this limit, the excess was either taxed at your:
- marginal rate of income tax
- beneficiaries’ marginal rate of income tax in the case of lump sum death benefits
Your pension provider will deduct the tax before you get your payment, except in the case of lump sum death benefits. Where lump sum death benefits are paid on the death of a member, the legal personal representative will be responsible for reporting any chargeable payments to HMRC.
You might still be able to protect your pension pot from previous reductions to the lifetime allowance.
Individual Lump Sum Allowance
The lump sum allowance is the maximum amount of benefits you can take from all your pension schemes as tax-free cash.
Usually, your lump sum allowance is £268,275, but this may be higher if you hold a protected allowance.
What counts towards your individual lump sum allowance
From 6 April 2024, if you take one of the following lump sums:
- Pension Commencement Lump Sum
- Uncrystallised Funds Pension Lump Sum — 25% tax free element of the lump sum
- Stand alone lump sum
This will be a relevant benefit crystallisation event. The amount of lump sum you take is tested against your available allowances.
Working out your available lump sum allowance
It may be that no relevant benefit crystallisation event has occurred before you take your lump sum. In this case the whole of your individual lump sum allowance is available.
A relevant benefit crystallisation event may have occurred since 6 April 2024. If so, your available lump sum allowance is the amount left after deducting any previously used amount.
Your available lump sum allowance may be nil depending on amounts you have used before.
There are transitional arrangements for tax-free amounts if you took pension benefits before 6 April 2024.
Trivial commutation lump sums and winding-up lump sums
You must have all or part of your lump sum allowance available to be able to take a trivial commutation or winding-up lump sum.
The payment of such lump sums does not reduce your available lump sum allowance.
Pay tax if you go above your individual lump sum allowance
If your uncrystallised funds pension lump sum takes you over your available lump sum allowance, you will pay income tax on the excess.
If you take a pension commencement lump sum, you’re limited to your available lump sum allowance. You may be able to take a pension commencement excess lump sum above this allowance, on which you will have to pay income tax.
Your pension provider will deduct the tax before paying you the lump sum.
Individual Lump Sum and Death Benefit Allowance
This allowance is the maximum amount of benefits you or your beneficiaries can take from all your pension schemes as a tax-free lump sum.
Usually, your lump sum and death benefit allowance is £1,073,100, but this may be higher if you hold a protected allowance.
What counts towards the individual lump sum and death benefit allowance
When you’re under 75, the following count towards the individual lump sum and death benefit allowance:
- Serious ill-health lump sum
- Uncrystallised funds lump sum death benefit
- Drawdown pension fund lump sum death benefit
- Annuity protection lump sum death benefit
- Flexi-access drawdown lump sum death benefit
- Pension protection lump sum death benefit
- Defined benefits lump sum death benefit
The following lump sums also count towards the individual lump sum and death benefit allowance:
- a pension commencement lump sum
- an uncrystallised funds pension lump sum — 25% tax free portion of the lump sum
- Stand alone lump sums
Working out the available lump sum and death benefit allowance
It may be that no relevant benefit crystallisation event has occurred before you take your lump sum. If this is the case, then the whole of your individual lump sum and death benefit allowance is available.
A relevant benefit crystallisation event may occur on or after 6 April 2024. If so, your available lump sum allowance is the amount left after deducting your previously used amount.
Your available lump sum and death benefit allowance may be nil depending on amounts you have previously used.
There are transitional arrangements for tax-free amounts if you took pension benefits before 6 April 2024.
Pay tax if you go above your individual lump sum and death benefit allowance
If your lump sum takes you over your available lump sum and death benefit allowance, you or your beneficiaries will pay income tax on the excess.
For serious ill health lump sums your pension provider will deduct the tax before you start getting your pension.
For lump sum death benefits paid on the death of a member, the legal personal representative will be responsible for reporting any chargeable payments to HMRC.
Transitional arrangements
You will have a reduced lump sum allowance and lump sum and death benefit allowance if you had one or more benefit crystallisation event before 6 April 2024.
This is to show that you have used some or all your lifetime allowance before 6 April 2024.
You will need to rely on transitional rules to calculate your available allowances. You can read more about transitional rules at PTM174000.
These calculations will:
- reflect your tax-free benefits taken before 6 April 2024
- ensure you are not put in a worse tax position than you would have been under the lifetime allowance system
You may have used all your lifetime allowance before 6 April 2024. If so then under the standard calculation you will have no available lump sum allowance or lump sum and death benefit allowance.
If you have only used some of your lifetime allowance before 6 April 2024, then under the standard calculation, there will be a reduction in your available allowance. This reduction is usually calculated as an amount equal to 25% of your lifetime allowance used previously.
The standard calculation will produce the right result for most individuals, in which case you do not need to take any action.
Your pension scheme should provide you with a statement showing the monetary amounts of your allowances used.
You may find the result of the transitional calculation does not accurately reflect your tax-free benefits taken before 6 April 2024. This may be because you have taken less than 25% of your lifetime allowance used as tax free benefits. In this case, you may choose to apply for a transitional tax-free amount certificate.
If you choose to apply for a certificate, you do not need to apply immediately after 6 April 2024. But you must apply before your first relevant benefit crystallisation event. You must also provide evidence of your actual tax-free amounts used before 6 April 2024 to your pension scheme.
You only need to apply to one scheme, but your evidence must cover any tax-free amounts taken from all your schemes. If satisfactory to the scheme, they will issue a transitional tax-free amount certificate. They have three months to consider your application.
On the occurrence of your first relevant benefit crystallisation event:
- the certificate must be used to calculate your available lump sum allowances
- your available lump allowances gets reduced by the transitional amount on the certificate
You can find more information about transitional tax-free amount certificates in the Pensions Tax Manual : PTM174300