From 6 April 2024, HMRC have placed limits on the amount of money that can be taken tax-free from pensions. These limits are measured against allowances used up by money taken during your lifetime and any money paid when you die.
The standard Lump Sum Allowance is £268,275 and the standard Lump Sum & Death Benefit Allowance is £1,073,100. These allowances reduce each time you take money tax-free from pensions.
Your personal allowances may be higher than the standard amounts if you’ve applied successfully for one or more protections from HMRC.
There is also an Overseas Transfer Allowance which is set at £1,073,000 and is the maximum amount you can transfer overseas to a Qualifying Recognised Overseas Pension Scheme without having a tax charge.
You can find out more information about the changes and new allowances in our Further Information or on the HMRC website: gov.uk/tax-on-your-private-pension.
If it is likely that the new allowances are going to affect you, you may need to request a Transitional Tax Free Amount Certificate from us, or any of your other pension providers.
Whoever provides your certificate, from 6 April 2024 we need to have a copy of this certificate on record before you take any more pension lump sums. We also recommend you get financial advice.
Building your pension pot
For the 2023/24 tax year, the Lifetime Allowance is the maximum amount of pension savings you’re allowed to build up during your lifetime and take some of the benefits tax free.
From 6 April 2024, the Lifetime Allowance for pensions has been removed and replaced with new allowances that limit the amount of tax-free benefits that can be taken rather than the pension savings you can build up.
It’s important that you understand how these changes may affect your retirement planning.
The purpose of the Lifetime Allowance was a way of limiting tax-favoured pension savings in registered pension schemes. The change now shifts so that there will no longer be a limit on the tax-favoured savings, but instead 3 allowances that act to limit the amount of tax free benefits that individuals (or their estate/beneficiaries) can receive. It has the same effect as the LTA.
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 benefit. This has been set at £268,275 for anyone without Lifetime Allowance protections, which is the same maximum as the current Lifetime Allowance. (iLSA- Individual Lump Sum Allowance).
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 for anyone without Lifetime Allowance protections and is again the same maximum as the current Lifetime Allowance. (iLSDBA-Individual Lump Sum and Death Benefit Allowance)
Overseas transfer Allowance (OTA) - This caps the maximum tax-free amount that can be transferred out of the UK. This has been set at £1,073,100 for anyone without Lifetime Allowance protections.
No. The government will be introducing 3 new pension allowances from 6 April 2024 that will restrict the value of pension benefits in the same way that the Lifetime Allowance (LTA) framework did.
Tax free benefits will be restricted to the same amount that is currently available under the LTA framework and remaining benefits will be taxed as income under PAYE.
| iLSA Individual Lump Sum Allownce) | iLSDBA (Individual Lump Sum Death Benefits Allowance) | |
| Pension Commencement Lump Sum* | Yes | Yes |
| Uncrystallised Funds Pension Lump Sum (25% of the payment that is not chargeable to income tax) | Yes | Yes |
| Stand Alone Lump Sums** | Yes | Yes |
| Serious Ill Health Lump Sum (where eligible and payable before age 75) | No | Yes |
| Defined Benefits Lump Sum Death Benefit (where death occurs before age 75 and payable within 2 years of notification) | No | Yes |
| Pension Protection Lump Sum Death Benefit (applicable to Scheme Pensions) | No | Yes |
| Uncrystallised Funds Lump Sum Death Benefit (where death occurs before age 75 and payable within 2 years of notification) | No | Yes |
| Annuity Protection (where death occurs before age 75 and payable within 2 years of notification) | No | Yes |
| Drawdown Pension Lump Sum Death Benefit (where death occurs before age 75 and payable within 2 years of notification) | No | Yes |
| Flexi-access Drawdown Lump Sum Death Benefit (where death occurs before age 75 and payable within 2 years of notification) | No | Yes |
*Where protected TFC is paid greater than 25% of the fund value, only an amount equivalent to 25% counts towards the iLSA. (This includes Authorised Easement)
**For Stand Alone Lump Sums (SALS), it is only 25% of the tax-free element paid that counts towards the iLSA however the full tax-free element of the SALS payment counts towards the iLSDBA.
If, by 5 April 2024, you have no Lifetime Allowance available, then you will have no Lump Sum Allowance or Lump Sum Death Benefit Allowance available either. When you take your benefits, any lump sums will be taxable at your marginal rate.
Individuals with any existing LTA protections, will see an increase in the new pension allowances value so that it matches what was available to them under the LTA framework.
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 their protected LTA and a death benefit and overseas transfer limit of 100% of their protected LTA. The value of the LTA will be dependent on which fixed/individual protection the customer applied for.
Enhanced Protection – This was introduced in 2006. If they 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. 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 any lifetime allowance 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 pension benefits already taken will be deducted from your personal allowances to determine the balance remaining.
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.
*Benefits taken before 6 April 2006 and no other benefits 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.
For Serious Ill Health Lump Sums paid before 6 April 2024 then the allowance is reduced to 0. 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 is carried out on all clients’ 75th birthday regardless of whether they are taking their pension benefits. This check is not counted as having taken benefits before 06/04/2024. Any age 75 LTA certificate should be ignored for the purpose of working out how much is remaining of any of the new allowances.
Any cases prior to 6 April 2023 that have had a lifetime allowance charge applied will have to follow the previous process to confirm that they had available LTA in order to recover this charge from HMRC
The LTA certificate they received will have taken this notional benefit crystallisation event into account. If you have any other uncrystallised rights, and can evidence that no tax free lump sum was taken, you can apply for a Transitional Tax Free Allowance Certificate from one of your pension schemes. This provides you with a personal lump sum amount to apply to benefits going forward.
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.
They can get this from any Pension Scheme they are a member of by asking for a “Transitional Tax Free Allowance Certificate’. This shows a personal amount of 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.
If you’ve taken benefits 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 Lump Sum Allowance Death Benefit Allowance 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.
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 death benefits are paid out from 6 April 2024.
Death Claims:
No, HMRC have agreed to maintain the current approach for death benefits.
The policy’s full value is paid out without checks against the allowance, and it is your responsibility as the Legal Personal Representative to determine if the policy holder had allowances that would allow the benefits to remain tax free.
Serious Ill Health Lump Sums:
If they are under 75 and have available iLSDBA they will continue to receive the lump sum payment tax free. If they don’t have sufficient iLSDBA, they will received up to the remaining amount up to their iLSTDBA tax free, the rest would be taxed at the marginal rate.
For PHs over 75, there will be no change and these payments will continue to be fully taxable.
As per the current LTA regime, it is the personal representatives who determines which payments need to be taxed.
The personal representatives will provide the details to HMRC and then HMRC will contact the appropriate beneficiaries to recover the tax.
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.
Please note: For death benefit cases tax is due on all benefits paid after death of a member over aged 75 or under age 75 where death benefits are not paid within 2 years of notification. Where death occurs under age 75 and paid within 2 years of notification, tax is paid on any excess lump sum over the death benefit allowance.
We are unable to comment on any potential future changes to taxation of pension savings. We would recommend you seek financial advice if you need help saving or planning for your future retirement.
We haven’t yet been able to update all our paperwork to reflect the changes to the Lifetime Allowance as draft legislation setting out the proposals was published at the end of November 2023.
There is currently a dedicated project team who are looking into the relevant documents and priorities where changes will be made to ensure that we will be able to make payment of benefits under the new rules from 06/04/2024. We expect that there will be some literature that still references Lifetime Allowance up until the end of 2024.
