What is the lump sum allowance?
Know your tax-free cash limit
If the value of your pensions is close to £1,073,100, or likely to reach this by the time you retire, then you need to know about the lump sum allowance (LSA). This limits the amount of tax-free cash you can take from the value of all your pension arrangements, including:
- final salary/career average (defined benefit) schemes
- personal pensions (also known as defined contribution pensions)
- any pension that has paid you a lump sum or income.
It doesn’t include the State Pension.
The LSA is one of three allowances that were brought in on 6 April 2024 to replace the lifetime allowance (LTA). The other two are the lump sum death benefit allowance (LSDBA), which affects the beneficiaries of someone who dies before the age of 75; and the overseas transfer allowance (OTA), which affects those who want to transfer their pension overseas.
How much is my lump sum allowance?
For most people, the standard starting LSA is £268,275. This is the limit of the tax-free money you can take from your pension savings in total - whether that’s as a single tax-free lump sum or spread across several withdrawals, each with a tax-free portion. The figure is based on 25% of the old standard lifetime allowance.
If the total value of all your pension savings is under £1,073,100, the LSA is unlikely to affect you.
If you applied to HMRC for lifetime allowance protection - or if you had tax-free cash protection - your starting LSA may be higher than the standard LSA. There are different types of protection, so it’s best to speak to an authorised financial adviser to find out how you might be affected.
If you’ve already taken all the tax-free cash you were entitled to before 6 April 2024, then you won’t have any LSA left. If you took just some (or none) of your tax-free allowance before 6 April 2024, then your starting LSA might be reduced accordingly. If this is the case, you might want to consider applying for a transitional tax-free amount certificate. This shows how much tax-free cash you have left to take after 6 April 2024. You are only eligible to apply for one if you:
- Have taken pension benefits between 6 April 2006 to 6 April 2024, and
- Have not taken pension benefits from 6 April 2024 that used any of your LSA / LSDBA.
To apply for a transitional tax-free amount certificate please call us.
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