LSA & LSDBA FAQs

The lifetime allowance has been abolished with effect from 6 April 2024 and has been replaced by new allowances, including the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA).

With effect from 6 April 2024, the lifetime allowance has been replaced by the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA). There is also a new overseas transfer allowance (OTA). A check is made against these allowances when certain lump sum benefits are paid or if benefits are transferred overseas.

Whether or not the changes affect you will depend on your personal circumstances - including the total value of your pension savings, whether or not you’ve already taken benefits from a pension scheme, whether or not you have any form of lifetime allowance protection and so on.

The lump sum allowance (LSA) limits the amount of tax-free lump sums you can take from pensions in your lifetime. Any amount you take over your available allowance will be taxed at your marginal rate of income tax.

The amount you’ll be able to take as a tax-free lump sum will usually be the lower of 25% of your uncrystallised fund value, your available LSA and your LSDBA.

The standard maximum LSA is £268,275. Your available allowance may be more or less than this if you have already taken pension benefits before 6 April 2024, or if you hold lifetime allowance protection. It will also be reduced when you take relevant tax-free lump sums from 6 April 2024.

The LSA applies to (amongst other things) any Pension Commencement Lump Sum (PCLS) and to the tax-free part of any Uncrystallised Funds Pension Lump Sum (UFPLS) you take. These lump sums are also tested against your available lump sum and death benefit allowance (LSDBA).

The lump sum allowance applies when certain relevant benefit crystallisation events occur.

The lump sum and death benefit allowance (LSDBA) is the overall limit on the amounts that can be paid tax-free when paid as a lump sum (known as relevant lump sum death benefits). It is set at £1,073,100 (unless the member has a valid form of LTA Protection in place) and there is no provision in the legislation for this amount to be increased in the future. It doesn’t apply to any death benefits paid from funds crystallised before 6 April 2024 and nor does it apply to death benefits payable if you died on or after your 75th birthday (all of which are subject to tax at your beneficiaries’ marginal rates of tax).

Any amounts over your allowance paid as a lump sum to your beneficiaries on your death before your 75^th birthday will be taxed at the beneficiary’s marginal rate of income tax.

The lump sum and death benefit allowance (LSDBA) applies when certain relevant benefit crystallisation events (RBCEs) occur. This includes lump sum payments to individuals in their lifetime, lump sum death benefits paid when someone dies prior to their 75^th birthday and on the payment of a serious ill health lump sum.

Small lump sum payments under £10,000 (trivial commutation lump sum death benefits) are not tested against this allowance.

A charity lump sum death benefit is not tested against this allowance.

Lump sum death benefits from funds crystallised prior to 6 April 2024 are not tested against this allowance.

Pensions legislation specifies the occasions when a Scheme Administrator must check whether a lump sum being paid to a member exceeds that member’s available lump sum allowance or lump sum and death benefit allowance. These occasions are known as relevant benefit crystallisation events. Any lump sum that has been paid prior to the 6 April 2024 is not an RBCE.

Hence, RBCEs only relate to lump sum payments from pension schemes and not pension income.

Your available allowances might be reduced if you started taking benefits from a pension scheme before 6 April 2024.

If you die on or after your 75^th birthday, the LSDBA does not apply to the payment of death benefits because all benefit payments will be subject to your beneficiaries’ marginal rates of tax – whether paid as a lump sum or pension income.

No, the LSDBA and LSA only apply to lump sum payments from pension schemes.

The only forms of LTA protection still open for new applications are Fixed and Individual Protections 2016. The closing date for applications for these is 5 April 2025.

Lump sum benefit payments that exceed the LSA or LSDBA will be subject to income tax at the recipient’s marginal rate of tax.

To ensure that those members who did not take maximum tax-free cash prior to 6 April 2024 are not adversely affected by a default calculation, they can apply to the pension scheme from which they wish to take their first benefits on/after 6 April 2024 for a “transitional tax-free amount certificate.” In order to do so, the member will need to supply complete evidence of the retirement benefits they have taken prior to 6 April 2024.

This will confirm the actual amount of tax-free lump sum the member took from that scheme prior to 6 April 2024 – and it is that amount which is deducted from the LSA and LSDBA.

However, once applied for, it cannot be revoked and may not always be in the best interests of the scheme member. Please speak to your financial adviser.