Lifetime allowance FAQs

As of 6 April 2024, the concept of Lifetime Allowance (LTA) has been abolished. Certain Benefit Crystallisation Events (BCEs) that were associated with a Lifetime Allowance Test have been removed. Any Benefit Crystallisation Events associated with a lump sum will remain; these are now referred to as relevant Benefit Crystallisation Events (rBCEs). rBCEs will be tested against the new allowances.

The Government initially announced their intent to abolish the Lifetime Allowance in the Spring Budget 2023. In the interim, any BCEs in the 2023/24 tax year would not result in a Lifetime Allowance excess tax charge and would instead be taxed at the client’s marginal rate of income tax. Prior to this, Lifetime Allowance excess tax charges could be paid at a rate of 55% tax or 25% tax dependent as to whether the excess was paid to the client as a lump sum or remained in the SIPP. As the Lifetime Allowance will be abolished as of 6 April 2024 there will no longer be a Lifetime Allowance excess tax charge.

Lump Sum Allowance (LSA): this is the standard amount of tax-free lump sums an individual may receive from all registered pension schemes during their lifetime without a tax penalty.  These tax-free lump sums will also count towards an individual’s lump sum and death benefit allowance. The standard Lump Sum Allowance for tax year 2024/25 is £268,275 unless a client holds transitional protection. Any payments in excess of this amount are subject to income tax at the client’s marginal rate. Note that this is the same value as 25% of the 2023/24 lifetime allowance.

Lump Sum and Death Benefit Allowance (LSDBA): this is the standard limit on lump sums payable from all of an individual's registered pension schemes, including serious ill health lump sums and lump sum death benefits, without a potential tax penalty. The standard Lump Sum and Death Benefit Allowance for tax year 2024/25 is £1,073,100 unless a client holds transitional protection. Any payments in excess of this amount are subject to income tax. Note that this is the same value as the 2023/24 lifetime allowance.
 
Overseas Transfer Allowance (OTA): this is a limit on transfers to a Recognised Overseas Pension Scheme (ROPS). The Overseas Transfer Allowance for tax year 2024/25, for most people, is £1,073,100. Any amounts transferred in excess of this allowance, or a transfer where no exclusion applies, will be subject to the overseas transfer charge of 25%. Note that this is the same value as the 2023/24 lifetime allowance.

• Pension Commencement Lump Sum (PCLS)
• Non-taxable element of Uncrystallised Fund Pension Lump Sum (UFPLS)

• Pension Commencement Lump Sum (PCLS)
• Non-taxable element of Uncrystallised Funds Pension Lump Sum (UFPLS)
• Serious Ill-Health Lump Sum, if paid from uncrystallised funds and to an individual under age 75
• Lump sum death benefits, where a member dies under age 75 and the claim is settled within 2 years and funds derived from uncrystallised funds or funds crystallised post 5 April 2024

Note: Awaiting further guidance - transitional calculations that reduce the OTA.

To determine how much Lump Sum Allowance remains, the previously-used amount of Lifetime Allowance is utilised, assuming a BCE took place on 5 April 2024. The Lump Sum Allowance is reduced by 25% of the previously-used amount.

Example
If a client has utilised 60% of their Lifetime Allowance via drawdown BCEs, the following calculation takes place:

60% of LTA used = (60% x £1,073,100) = £643,860.
25% of this = (25% x £643,860) = £160,965.

The Lump Sum Allowance is then reduced by this amount:
£268,275 - £160,965 = £107,310.
So £107,310 of the client’s Lump Sum Allowance is remaining.
 
If the client holds a protection certificate where a higher Lifetime Allowance replaces the standard Lifetime Allowance then the calculation is based on the protected Lifetime Allowance and the protected Lump Sum Allowance:

60% of LTA used = (60% x £1,800,000) = £1,080,000.
25% of this = (25% x £1,080,000) = £270,000.

The Lump Sum Allowance is then reduced by this amount:
£450,000 - £270,000 = £180,000.  
So £180,000 of the client’s Lump Sum Allowance is remaining.

To determine how much Lump Sum and Death Benefit Allowance remains, the appropriate percentage of Lifetime Allowance previously used is utilised, assuming a BCE took place on 05 April 2024. The Lump Sum and Death Benefit Allowance is reduced by the appropriate percentage. The appropriate percentage is 100% of any Serious Ill Health Lump Sums (SIHLS) from uncrystallised funds where the individual was under 75, 100% of any Lump Sum Death Benefits paid (where the individual was under 75 and the claim settled within the two year deadline), or 25% of any previously used amount.

The type of protection that a client holds determines what new rules are in place and how the Lump Sum Allowance and Lump Sum and Death Benefit Allowance are impacted.

The restriction on clients being unable to take a UFPLS due to holding an enhancement factor has been removed and they will be able to take UFPLS payments from 06 April 2024.  

For the following protection types, the standard Lump Sum and Death Benefit Allowance of £1,073,100 is replaced by their personal Lifetime Allowance and the standard Lump Sum Allowance is 25% of this.

For all other protection types there are more complex rules in place, explained in the table below.

*If the client holds another form of protection then their protected amount is used in replace of the standard amount. 

Where a client has scheme specific protection, the existing formula for calculating their PCLS entitlement has been replaced with the following:   
(A x 1.2) + B
 
•    A is the value of uncrystallised lump rum rights under the scheme as at 5 April 2006  
•    B is the additional lump sum amount.
 
The full definition of ‘B’ within the legislation needs updated.

As of 6 April 2024 the Annuity BCE will no longer be required. If the client wishes to take a tax-free lump sum before purchasing an annuity then the tax-free lump sum will be tested against the allowances via an rBCE.

Where a member dies under age 75, and the claim is settled within two years, any lump sums will count towards the Lump Sum and Death Benefit Allowance (LSDBA). Only funds that are uncrystallised or were crystallised on or after 6 April 2024 will be tested against the LSDBA. We will then confirm to the personal representative the amount of LSDBA used and they are responsible for notifying HMRC if the LSDBA has been exceeded so that the beneficiaries can settle any tax liabilities.  

Where a member dies age 75 or over, whether funds are crystallised or uncrystallised, or where the two year deadline is not met, any lump sums will be subject to income tax in their entirety and will not reduce the LSDBA.  Payments to non-qualifying persons, such as trusts and charities, will be taxed at 45%. In these scenarios we will settle the tax liabilities. 

The current overseas transfer exclusion requirements are:

• Member and receiving scheme in the same country
• Receiving scheme in European Economic Area (EEA) state or Gibraltar & member resident in United Kingdom (UK) or EEA
• Receiving scheme is an occupational scheme
• Receiving scheme set up by an international organisation
• Receiving scheme is an overseas public service scheme