Guide to pension lump sum allowances

This content was reviewed and approved by Tamlin Russell.

What is the lump sum allowance?

The lump sum allowance was introduced on 06 April 2024 following the abolition of the lifetime allowance. It limits the total tax-free lump sum you can receive from all your pensions combined.

You can usually take up to 25% of the money you’ve saved into your pensions tax-free, provided the overall total is less than £268,275 - known as your lump sum allowance (LSA). This tax-free allowance remains the same as it was under the old lifetime allowance.

Each time you take money from your pension you’ll be asked about any previous pension withdrawals. That way, your pension provider will accurately monitor how much of your LSA has been used. 

What counts towards your individual lump sum allowance?

Your individual lump sum allowance is linked to the type of lump sum you take.

The following all count towards your LSA:

• A pension commencement lump sum
• The 25% tax-free part of an uncrystallised funds pension lump sum
• A standalone lump sum

What is the lump sum and death benefit allowance?

Set at a higher level, the lump sum & death benefit allowance (LSDBA) is a second allowance that limits the amount that can be paid tax-free from your pensions. As well as limiting tax-free cash, the lump sum & death benefit allowance (LSDBA) also limits the amount that can be paid as a tax-free lump sum on death before age 75 or if you are in serious ill-health (a serious ill-heath lump sum). 

This limit is capped at £1,073,100 for those without transitional protection and is equal to the level of the old lifetime allowance immediately before it was abolished. If you hold a transitional protection, your LSDBA might be higher.

Apart from a ‘charity lump sum death benefit’ or a ‘trivial commutation lump sum death benefit’, all lump sum death benefits paid on death before age 75 are tested against the deceased’s remaining LSDBA.

However, if you took your pension benefits before 6 April 2024, they would have already been tested against the lifetime allowance at that time. Where this is the case, any lump sum death benefit paid from these funds won’t be tested for a second time against the LSDBA.

Your LSDBA is used up by most tax-free lump sums taken from your pensions both before and after your death. Therefore, your chosen beneficiaries could receive less of your pension tax-free if you’ve already taken tax-free lump sums from your pension savings and you die before age 75. They’ll normally pay income tax on the money if the lump sums they receive are higher than your remaining LSDBA.

What is the overseas transfer allowance?

If you’re moving abroad and thinking of transferring your pension with you, the overseas transfer allowance (OTA) is equal to your remaining LSDBA. Your OTA is then used up when you transfer your pension to certain overseas schemes, known as Qualifying Recognised Overseas Pension Schemes (QROPS).

Any amount transferred to a QROPS that does not fall within your available OTA is subject to a 25% tax charge.

£268,275 Lump sum allowance	£1,073,100 Lump sum and death benefit allowance	Equal to remaining LSDBA Overseas transfer allowance
The total tax-free lump sum you can receive from all your pensions.	The total tax-free lump sum that you or your beneficiaries can take from all your pension schemes.	The total tax-free allowance when you transfer your pension abroad.

Has the ‘lump sum allowance’ and ‘lump sum & death benefit allowance’ replaced the lifetime allowance?

In a way, yes. The lifetime allowance was the total amount of pension benefits you could amass during your lifetime and typically receive up to 25% tax-free. The limit was capped at £1,073,100 for most people.

On 6 April 2024, the lifetime allowance was abolished, and three new allowances were introduced to limit the amount of tax-free pension savings people can take. These are the lump sum allowance, the lump sum & death benefit allowance and the overseas transfer allowance.

Are my allowances affected if I took benefits before 6 April 2024?

Yes. If you took (‘crystallised’) benefits before the lifetime allowance was abolished, your LSA & LSDBA will be reduced to account for any tax-free cash you may have already received.

A transitional calculation is carried out. This broadly assumes that you took 25% of the lifetime allowance used as tax free cash. Your LSA and LSDBA will then be reduced by that amount.

In some cases, the transitional calculation will overstate or understate the amount of tax-free cash you actually took. If you took less than 25% as tax-free lump sums, or you took pension money between 6 April 2016 and 5 April 2020 (when the lifetime allowance was lower), you can ask your pension provider for a transitional tax-free amount certificate.

Getting a transitional tax-free amount certificate will mean that your LSA and LSDBA will be reduced by the tax-free amounts you actually took, rather than assuming you took the maximum 25%. However, you can only get the certificate before you start taking any tax-free cash after 5 April 2024.

Importantly, once you get a transitional tax-free amount certificate, it cannot be revoked. This is the case even if it reduces your tax-free allowances and puts you in a worse position. If you’re unsure whether a transitional tax-free amount certificate might benefit you, speak to a retirement and pension adviser.

What are my allowances if I have transitional protection?

Some people hold a form of transitional protection which provided a higher lifetime allowance or an additional tax-free cash entitlement – these include enhanced protection, primary protection, individual protection, fixed protection or a scheme specific lump sum enhancement.

If you hold transitional protection, the LSA and LSDBA will be adjusted to allow you to take the same benefits that you were entitled to before the lifetime allowance was removed on 6 April 2024. 

If you’re unsure about your allowances, speak to a retirement and pension adviser.

When can I start taking money from my pension?

In most cases, you can take money from your private pension, including workplace pensions, from age 55 (rising to 57 from April 2028). This is known as the normal minimum pension age (NMPA).

There are many ways to withdraw money from your pension. These include:

• Buying an annuity: Annuities turn your retirement savings into a regular income for a fixed term or the rest of your life.
  
• Pension drawdown: A pension or income drawdown allows you to withdraw money from your pension while keeping the remainder invested. You can take 25% of your pension tax-free and the rest will be taxed as income.
  
• Taking a lump sum: You can withdraw all or some of your pension money as a lump sum. In most circumstances, you can withdraw 25% tax-free, with the remaining 75% taxed as income.

You can also take the State Pension once you reach State Penson age, which varies depending on your date of birth. You can calculate this on the government’s page on planning your retirement.

While some people decide to take their pension when they reach NMPA, others wait until later and allow their savings to grow. It is an important decision that requires careful consideration, and plenty of professional retirement and pension advice is available to help you make the right choice.

Need friendly advice about your lump sum allowance and lump sum & death benefit allowance?

If you or your beneficiaries are affected by the lump sum allowance, lump sum and death benefit allowance or overseas transfer allowance, speak to one of our retirement and pension experts and put your mind to rest. Alternatively, contact us today.