The UK government removed the Lifetime Allowance (LTA) from 6 April 2024. The LTA was a limit on the amount of money people could take from a pension during their lifetime. Going over this limit would mean an additional tax charge would need to be paid.
In place of the LTA, limits on the amount of money that can be taken tax free have been introduced. Most people won’t be affected by this unless you have total pension savings of £700,000 (or have taken tax-free lump sums of £175,000) or more.
Depending on what’s being done with the pension, one of three different allowances may apply. If you’re over the relevant allowance then any money left over will be subject to tax.
This means that when the money is paid to you, we’ll take income tax off the payment and pay it to HM Revenue and Customs (HMRC) for you.
Lump Sum Allowance (LSA) – This caps the total tax-free lump sum that can be paid from all the pensions you have when you take your retirement savings. This has been set at £268,275 which is the same maximum as the previous LTA .
Lump Sum and Death Benefit Allowance (LSDBA) - This caps the tax-free lump sum that can be paid from all pensions that you have when you die. This has been set at £1,073,100 which is again the same maximum as the previous LTA.
Overseas Transfer Allowance (OTA) - This caps the amount that can be transferred to pensions outside of the UK without a tax charge. This has been set at £1,073,100.
If you’ve applied to HMRC for LTA protections then the limits above will usually be higher.
iLSA (Individual Lump Sum Allowance):
- Taking any retirement option that includes money paid to you tax-freeT
- The only exception to this is if you use special rules to fully cash-in pension pots valued at less than £10,000 (this is called using ‘small pots’ rules)
iLSDBA (Individual Lump Sum Death Benefits Allowance)
- Serious Ill Health Lump Sum (paid when you’re alive, but you have a life limiting illness)
- Lump sum death benefits payable before age 75 (paid after you die, if you were under age 75)
If, by 5 April 2024, you had no LTA available, then you will have no Lump Sum Allowance or Lump Sum Death Benefit Allowance available either. When you take your retirement savings, any lump sums will be taxable at your marginal rate.
If you have any existing LTA protections, you will see an increase in the new pension allowances value so that it matches what was available to you under the LTA rules.
The different types of previous LTA protections are Fixed and Individual Protection, Enhanced Protection and Primary Protection.
Fixed and Individual Protection –This will provide a personal lump sum allowance of 25% of the protected LTA and a death benefit and overseas transfer limit of 100% of the protected LTA. The value of the LTA will be dependent on which fixed/individual protection you applied for.
Enhanced Protection – This was introduced in 2006 and could only be applied for until 2009. If you have protected Pension Commencement Lump Sum (PCLS) rights, the personal lump sum allowance will be the maximum that could have been paid out on 5 April 2023. If there is no protected PCLS then the personal lump sum allowance maximum will be £375,000. For death benefits and overseas transfers the maximum is the amount that could have been paid at 05/04/2023.
Primary Protection – This was introduced in 2006 and could only be applied for until 2009. If they have protected PCLS rights, the personal lump sum allowance will be the value of those protected rights increased by 20%. If there is no protected PCLS then the personal lump sum allowance maximum will be £375,000. For death benefits and overseas transfers the maximum is £1.8m multiplied by the individual primary protection factor
*This is not the same as scheme specific tax free cash (also known as Transitional TFC)
Yes, As there is no longer an LTA test you can accrue new pension benefits, join new arrangements or transfer without losing this protection so long as it was applied for before 15 March 2023, and a certificate or reference number subsequently issued.
The value of any money taken from a pension already will be deducted from your personal allowances to determine the balance remaining.
Lump Sum Allowance:
Standard method – 25% of the LTA used under the old framework will be deducted from the lump sum allowance*.
Alternative method – If an individual can show that the actual tax-free lump sum paid was less than 25% of the LTA then they can apply for a ‘Transitional Certificate’ in which case the lower figure will be used.
*Money taken before 6 April 2006 and no other money taken until after 6 April 2024, the value of the pension in payment is multiplied by 25. 25% of that value is then deducted from the Lump Sum Allowance. The “Alternative method” does not apply.
Lump Sum Death Benefit Allowance:
For Serious Ill Health Lump Sums paid before 6 April 2024 then the full payment value is deducted from the allowance. For all other lump sums, it uses the same method as for the Lump Sum Allowance.
Overseas Transfer Allowance:
If a previous overseas transfer has been made, then the allowance is reduced by 100% of the value of that transfer.
An LTA check would have been carried out on your 75th birthday regardless of whether you took money from your pension. This check is counted as having taken any money before 06/04/2024. Your age 75 LTA certificate must be included for the purpose of working out how much of the new allowances you have left.
The first 25% of the lump sum is usually paid free of tax, but the rest should be taxed in the same way as earned income and reported under Pay As You Earn (PAYE). To be eligible you must have Lump Sum Allowance equal to the amount of the tax-free element of the payment. The amount paid tax-free will be reduced to either the amount of available Lump Sum Allowance or nil.
This option is also not allowed if you have enhanced or primary protection rules and this protection includes a protected lump sum of more than £375,000.
When you take a partially taxable withdrawal from your pension, as long the tax free element does not exceed the amount of your remaining iLSA, 25% will be tax-free and the remainder taxed as earned income. If you used all of your iLSA, the tax-free part of your partially taxable withdrawal will be restricted to the remaining amount of your available iLSA. The remainder will be taxed as earned income. So, if you used all of your iLSA, 100% of your partially taxable withdrawal will be taxed as earned income.
If you choose to buy an annuity, you can normally choose to take up to one quarter (25%) of the amount available to buy an annuity as a tax-free lump sum, (if you have available lump sum allowance), with the balance (75%) being used to buy the annuity. You can also use any funds you have previously designated for income drawdown to buy an annuity, but no tax-free lump sum will be available.
All annuity payments are taxed as earned income, and any tax due will be deducted by your annuity provider at the appropriate PAYE rate set by HMRC.
You must have enough remaining iLSA and iLSDBA to cover the tax-free lump sum. If you don't, the amount of tax-free lump sums that you will receive will be reduced by either your remaining allowance or could reduce to nothing. You may still be able to take a lump sum, but this would be taxable.
By taking a lump sum, we must then allocate money to drawdown at the same time. If you have a Retirement Account or SIPP, the amount you must usually allocate for drawdown is 3 times this amount.
If your total tax-free lump sum taken to date is more than the iLSA, we won’t be able to pay any further tax-free lump sums from your policy.
If you’re unsure whether you have enough iLSA available, you’ll also have to fill in our Lump Sum Allowance Detailed Questionnaire, and we’ll work out what you have left.
Each pension pot you take, you will still only be able to take up to the maximum amount of Pension Commencement Lump Sum as you can now. This is usually 25% of the pot.
If you have scheme specific tax free-cash (TTFC) you can still receive this.
In both cases you have to have enough Lump Sum Allowance available to have these paid tax free.
If you took money from a pension before 6 April 2024 but did not take any tax free lump sums, or took less than 25% of the pension pot as tax free cash, the usual conversion to apply to the new allowances assumes you did. This means that you’ll have less iLSA and iLSDBA available for future payments and could receive less tax free cash if you’re close to the limits already.
You can get this from any Pension Scheme you are a member of by asking for a “Transitional Tax Free Allowance Certificate’. You can also do this directly with ReAssure by going to https://www.reassure.co.uk/pensions/lump-sum-allowances/ttfac-application/
You must be able to provide confirmation that you did not receive 25% tax free from that payment. Your scheme administrator will then issue you with a certificate. This shows a personal amount of Lump Sum Allowance and personal Lump Sum and Death Benefit Allowance remaining in respect of your pre 6 April 2024 benefit crystallisation events. You must get this before you take a tax-free lump sum from 6/4/2024.
This can be requested by the customer’s Legal Personal Representative to any scheme of which they were a member. This will need to be done before any money is paid out from 6 April 2024.
The person receiving the benefit will be taxed at their marginal rate. For example, on a retirement it would be the policyholder/member whilst for a death claim it would be the beneficiary.
