What are the new lifetime tax allowances for pensions?

Prior to 6 April 2024, the lifetime allowance was the total amount of pension savings (apart from your State Pension) that you could build up while still getting the full tax benefits. From 6 April 2024, the lifetime allowance is replaced by three allowances: the lump sum allowance (LSA), the Lump Sum and Death Benefit Allowance (LSDBA) and the Overseas Transfer Allowance (OTA).

Prior to 6 April 2024, the lifetime allowance was the total amount of pension savings (apart from your State Pension) that you could build up while still getting the full tax benefits. From 6 April 2024, the lifetime allowance is replaced by three new allowances: the lump sum allowance (standard maximum £268,275), The Lump Sum Death Benefit Allowance (standard maximum £1,073,100) and the Overseas Transfer Allowance (standard maximum £1,073,100). However, if you have any Lifetime Allowance Protections these will give you a higher maximum starting point for LSA, LSDBA and OTA.

The lifetime allowance was the total amount of pension savings (apart from your State Pension) that you could build up while still getting the full tax benefits. From 6 April 2024, the lifetime allowance is  replaced by three allowances: 

• the lump sum allowance (LSA)
  The lump sum allowance (LSA) is a cap on the amount of tax-free cash you can take from your pension savings.
• the lump sum and death benefit allowance (LSDBA)
  The lump sum and death benefit allowance (LSDBA) limits the value of the pension savings you can leave your beneficiaries tax free, if you die before you’re 75.
  The LSDBA doesn’t apply if you die after 75, or if your beneficiaries take your pension as drawdown or as an annuity.
• the overseas transfer allowance (OTA)
  The overseas transfer allowance is a limit on the value of the pension savings you can transfer abroad without having to pay a tax charge.

One or more of these allowances will apply where tax-free payments are taken from your pension or you transfer your pension to an overseas scheme.

Under transitional rules, the level of your starting LSA and LSDBA may be reduced. By how much will depend on whether or not you obtain a Transitional Tax-Free Amount Certificate. If you're not sure whether getting a Transitional Tax-Free Amount Certificate would be right for you, we suggest you read our guidance below or speak to a financial adviser.

Yes, unless you have a Transitional Tax-Free Amount Certificate. We will need this information to calculate how much LSA you have remaining.

Yes, this is still protected.

Yes, you will have a higher LSA and LSDBA based on your protected lifetime allowance, and tax-free cash capped at 25% of the protected lifetime allowance.

Yes, you will have a higher LSA and LSDBA based on your protected lifetime allowance, and tax-free cash capped at 25% of the protected lifetime allowance.

It's simply a case of adding up all the LTA percentages you've received from providers across all your pension arrangements when you've taken a payment, transferred to a QROPS or reached the age of 75. If you don't know the LTA percentage used then you'll need to contact the relevant provider to find out.

The entitlement to tax-free cash is not changing - it's still capped at 25% of £1,073,100 (£268,275) or higher if you have a protected lifetime allowance.

You will have already reduced your LSA by using your lifetime allowance. You can calculate what your reduced LSA will be if you know the percentage of the lifetime allowance that you have already used.

This is the standard calculation provided by HM Revenue & Customs, and will apply to anyone without protections to their lifetime allowance.

To calculate the amount of LSA that you’re considered to have already used:

1. Take the total of your LTA % used up before 6 April 2024.
2. Multiply this percentage by £1,073,100  to give you the monetary amount of LTA used.
3. Take the monetary amount of LTA used and multiply this by 25%. This gives you the LSA you’ve already used.
4. You can then deduct this from your starting LSA to work out how much of your LSA remains.

For example, if you have used up 10% of your LTA and you have the standard LSA of £268,275: 

1. Your total LTA used is 10%.
2. Multiply 10% by £1,073,100, which gives you £107,310.
3. Then multiply the £107,310 by 25%, which gives you £26,827.
4. £268,275 (Standard LSA)     minus  £ 26,827 (the LSA you’ve already used)
   =    £241,448 (LSA remaining).

If any of the following applies to you then this might not be an appropriate calculation, as you may have taken less tax-free cash from your pension before 6 April 2024 than the calculation assumes:

• You took benefits from a pension (e.g. a defined benefit pension) where you don’t receive any tax-free cash, or 
• You reached the age of 75 before 6 April 2024, or
• You took tax-free cash between 6 April 2016 and 5 April 2020 when the LTA was lower than £1,073,100, or
• You have transferred some of your pension benefits abroad (to a QROPS).

If any of these do apply to you, we’d recommend you speak to an authorised financial adviser about applying for a transitional tax-free amount certificate. That’s because you may be eligible for a lower reduction to your LSA.

Some people with high-value pension pots have applied to HMRC to protect their lifetime allowance and will have received a certificate confirming this. There are several different types of protection, and the certificate may list one or more of the following:

• Primary protection
• Enhanced protection
• Fixed protection (2012, 2014, 2016)
• Individual protection (2012, 2014, 2016)

Broadly, your LSA will be 25% of your protected LTA figure. For example, if you had fixed protection 2016, your LSA will be 25% (a quarter) of your protected LTA of £1.25 million, which would give you a protected LSA of £312,500. Since there are so many different types of protection, we’d recommend you ask an authorised financial adviser or HMRC for help in working out your starting LSA. To calculate how much LSA you’ve already used, the formula above still applies – you’ll just need to replace the standard LTA figure of £1,073,100 with your protected LTA figure.

This allowance limits the value of the lump sum pension savings you can leave your beneficiaries tax free, if you die before the age of 75. The standard LSDBA is £1,073,100. Some people might have a higher allowance if they also had a higher protected lifetime allowance, or tax-free cash protections. If you take any tax-free cash from your pension while you’re alive (including a serious ill health lump sum) then your allowance will be reduced by the same amount. If the pension savings you leave are more than your LSDBA, your beneficiaries will have to pay tax on the extra amount, at their marginal rate of income tax.

If you die before the age of 75, your pension can generally be paid out as a tax-free lump sum to your beneficiaries subject to the lump sum and death benefit allowance (LSDBA). If your beneficiaries take your pension as drawdown or as an annuity, then the LSDBA doesn't apply and payments will be tax-free if paid within 2 years of notification of death.

After 2 years of notification of death or if you die after age 75, your beneficiaries have the same options, but they’ll have to pay income tax on the benefits and the LSDBA won’t apply.

You will have already reduced your LSDBA by using your lifetime allowance. You can calculate what your reduced LSDBA will be if you know the percentage of the lifetime allowance that you have already used.

This is the standard calculation provided by HM Revenue & Customs, and will apply to most people without protections to their Lifetime Allowance. (See below for exceptions.)

To calculate the amount of LSDBA that you are considered to have already used:

1. Take the total of your LTA % used up before 6 April 2024
2. Multiply this percentage by £1,073,100 to give you the monetary amount of LTA used.
3. You then multiply the monetary amount of LTA used by 25%.
4. You can then deduct this figure (25% of the amount of LTA used) from your starting LSDBA to work out how much of your LSDBA is left.

Example

If you have used up 10% of your LTA and you have the standard LSDBA of £1,073,100:

1. Your total LTA used is 10%.
2. Multiply 10% by £1,073,100, which gives you £107,310.
3. Multiply £107,310 by 25%, which gives you £26,827.
4. £1,073,100 (Standard LSDBA) minus £26,827 (the LSDBA you’ve already used)
   = £1,046,273 LSDBA remaining.

If any of the following applies to you then this may not be an appropriate calculation, as you may have taken less tax-free cash from your pension before 6 April 2024 than the calculation assumes:

• You took benefits from a pension (e.g. a defined benefit pension) where you do not receive any tax-free cash, or 
• You reached the age of 75 before 6 April 2024, or 
• You took tax-free cash between 6 April 2016 and 5 April 2020 when the LTA was lower than £1,073,100, or 
• You have transferred some of your pension benefits abroad (to a QROPS).

If this does apply to you, we’d recommend you speak to an authorised financial adviser about applying for a transitional tax-free amount certificate as you may be eligible for a lower reduction to your LSDBA.

Some people with high-value pension pots have applied to HMRC to protect their lifetime allowance and will have received a certificate confirming this. There are several different types of protection, and the certificate may list one or more of the following:

• Primary protection
• Enhanced protection
• Fixed protection (2012, 2014, 2016)
• Individual protection (2012, 2014, 2016)

Broadly, your LSDBA will be your protected LTA figure. For example, if you had fixed protection 2016, your LSDBA will be your protected LTA of £1.25 million. Since there are so many different types of protection, we’d recommend you ask an authorised financial adviser or HMRC for help in working out your starting LSDBA. To calculate how much LSA you’ve already used, the formula above still applies – you’ll just need to replace the standard LTA figure of £1,073,100 with your protected LTA figure.

There are two exceptions to the standard HMRC calculation, and these apply to:

• People who took a serious ill-health lump sum when they were under the age of 75, before 6 April 2024
• Beneficiaries of someone who died under the age of 75, who were paid a lump sum death benefit before 6 April 2024.

In both these cases the standard formula above is amended by replacing the 25% with 100%, so the formula is:

1. Take the total of your LTA % used up before 6 April 2024.
2. Multiply this percentage by £1,073,100 to give you the monetary amount of LTA used.
3. You then multiply the monetary amount of LTA used by 100%.
4. You can then deduct the 100% of the monetary amount of used LTA from your starting LSDBA to work out how much of your LSDBA remains.

For example, if you have used up 10% of your LTA and you have the standard LSDBA of £1,073,100:

1. Your total LTA used is 10% 
2. Multiply 10% by £1,073,100, which gives you £107,310
3. Multiply £107,310 by 100%, which gives you £107,310
4. £1,073,100 (Standard LSDBA) minus £107,310 (the LSDBA you’ve already used)
5. LSDBA remaining = £965,790

The overseas transfer allowance is the maximum value of pension savings you can transfer overseas tax-free (to a qualifying recognised overseas pension scheme, or QROPS) - if you go above this, you’ll be charged 25% tax on the excess. The standard allowance is £1,073,100, although some people may have a higher one.

If you’ve already taken any money from your pension pot, your overseas transfer allowance will be reduced by the same amount.

Previously, the charge applied to only some overseas transfers. From 6 April 2024, it applies to all of them where the allowance is exceeded.

A Transitional Tax-Free Amount Certificate is a document which allows scheme members - or personal representatives of a person who has died - to show how much LSA and LSDBA they have remaining when they access their benefits after 6 April 2024. 

You are only eligible to apply for one if you:

Have taken pension benefits between 6 April 2006 to 5 April 2024
And
Have not taken pension benefits from 6 April 2024 that used any of your LSA / LSDBA.

The answer to this is specific to the person and you should get advice if you’re unsure. However, you are only likely to benefit if you:

• Have ever taken pension benefits where you did not get a Pension Commencement Lump Sum / Tax Free Cash (e.g. a Defined Benefit pension with no Pension Commencement Lump Sum)
  
  OR
• Turned 75 before 6th April 2024
  
  OR
• Do not have a protected LTA and have taken benefits / used LTA in the period 6th April 2016 to 5th April 2020 when the LTA was lower than £1,073,100
  
  OR
• Have transferred money overseas to a Qualifying Recognised Overseas Pension (QROPS) from your UK pension