Pension Lifetime Allowance

What Changed from 2024/25

From 6 April 2024, there is no longer a lifetime allowance charge on pension benefits above the previous LTA threshold. Instead, the government introduced two new allowances: the lump sum allowance (LSA) and the lump sum death benefit allowance (LSDBA). The LSA caps the total amount of tax-free lump sum you can take from your pensions at £268,275 — which is 25% of the former £1,073,100 LTA. This applies to the pension commencement lump sum (PCLS) and other tax-free lump sums. The LSDBA sets a cap of £1,073,100 on the total lump sum death benefits that can be paid tax-free from your pensions when you die before age 75. These changes simplify the system while protecting the Exchequer from large tax-free transfers.

Lump Sum Allowance Details

The lump sum allowance of £268,275 applies across all your pension schemes. If you have already taken tax-free cash from a pension before 6 April 2024, the amount you have used is deducted from your available LSA. The LSA covers:

• Pension commencement lump sums (tax-free cash when you start drawing benefits)
• Serious ill-health lump sums (paid if you have less than 12 months to live)
• Stand-alone lump sums from uncrystallised funds
• Tax-free portions of UFPLS payments

Lump Sum Death Benefit Allowance

The lump sum death benefit allowance (LSDBA) is £1,073,100 for most people, though those with enhanced protection or other protections may have a higher allowance. This allowance caps the total tax-free lump sum that can be paid to your beneficiaries when you die before age 75. Any lump sum death benefit above this allowance is taxed at the beneficiary's marginal rate of Income Tax. The LSDBA is separate from the LSA, but any lifetime lump sum you have already taken reduces your LSDBA. The LSDBA also covers serious ill-health lump sums paid during your lifetime and any defined benefit lump sum death benefits.

Transitional Protections

Under the previous regime, various protections were available to shield savers from the LTA charge: Fixed Protection 2012, 2014, and 2016; Individual Protection 2014 and 2016; Enhanced Protection; and Primary Protection. These protections remain relevant because they can increase your available LSA and LSDBA above the standard amounts. If you hold a protection certificate, you should check how it applies under the new rules. In some cases, the protection gives you a higher entitlement to tax-free cash than the standard £268,275. The interaction between protection and the new allowances is complex and you should seek professional advice if you have a protected LTA right.

Overseas Transfers Charge

If you transfer your UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS), there may be an overseas transfer charge of 25% of the transfer value. This charge applies unless you and the pension are resident in the same country (or certain other exemptions apply). The charge was originally intended to prevent people from avoiding the LTA charge by moving their pension abroad, but it has been retained and modified following the LTA abolition. For transfers made on or after 30 October 2024, the charge also applies to transfers where the member is resident in the UK, unless specific conditions are met. Always check the QROPS status of any overseas scheme before transferring.

Planning Considerations After LTA Abolition

The removal of the lifetime allowance is broadly positive for pension savers. There is no longer a cap on how much you can build up in a pension without a tax charge at the point of crystallisation, making pensions more attractive for long-term accumulation. High earners can now consider larger pension contributions without the previous LTA constraint. However, the new lump sum limits mean that the tax-free cash entitlement is capped at £268,275 across all schemes. If you have very large pension savings, you may want to consider how to best manage the interaction between your tax-free cash entitlement, drawdown strategy, and death benefit planning. Professional advice is recommended for those with pension funds exceeding £1 million.