The New Lump Sum Allowance

From 6th April 2024, the pension Lifetime Allowance has been replaced by 3 different allowances:

1. the Lump Sum Allowance (LSA)
2. the Lump Sum and Death Benefit Allowance (LSDBA)
3. the Overseas Transfer Allowance.

This post will provide an introduction to the first 2 allowances, the LSA and LSDBA.

What was the pension Lifetime Allowance?

This was the total pension value you could build up in your lifetime before having a tax-charge. The allowance was £1,073,100 for most people.  You could normally receive up to 25% of this tax-free.

If the total value of your pension(s) exceeded the Lifetime Allowance in previous tax years, you were normally subject to a tax charge when taking benefits and at age 75.  However, from 6 April 2023, the tax charge was removed.  From 6 April 2024, the Lifetime Allowance was completely abolished.

The new Lump Sum Allowance (LSA)

Whilst there is no upper limit on the total value you can have in pensions, there is now a limit to the total tax-free sum you can take in your lifetime.  This is known as the Lump Sum Allowance (LSA).

For most people the LSA is £268,275 (25% of £1,073,100).  This may be higher if you have a former Lifetime Allowance protection.

Each time you take a tax-free sum from your pension, it will use some of your LSA until you reach the maximum limit.  Any amounts taken from your pension over the LSA is taxed at your marginal rate (of income tax).  Pension providers normally deduct this tax at source.

The Lump Sum and Death Benefit Allowance (LSDBA)

The LSDBA affects the maximum amount your beneficiaries can take from all your pension schemes as a tax-free lump sum if you die before age 75.  In most cases this allowance will be £1,073,100 (but again can be higher if you had former Lifetime Allowance protection).

Any tax-free lump sums you take in your lifetime is taken off the LSDBA.

In the event of your death, any lump sum death benefit paid out in excess of your remaining LSDBA will be taxed at your beneficiary’s marginal rate.  However, your beneficiaries may have the ability to designate the funds into drawdown and avoid any tax.

What if I previously took benefits before 6th April 2024?

If you have taken benefits prior to 6th April 2024, the value will be assessed against the new allowances and there are transitional rules that apply.  For most people, this will not create any issue and you do not need to take any action.  For those who are likely to be affected by the limits, your Beechwood adviser will be considering your position as part of the ongoing advice service.

Please note this is based on our understanding of current legislation which is subject to change.  This is for general information only and does not constitute individual advice.  Before taking action, please speak to an adviser at Beechwood.