Lump sum allowance

What was the lifetime allowance?

The lifetime allowance was the total capital value of pension savings you could build up without being liable for a tax charge when you claimed it (in 2023 this limit was £1,073,100). This limit was abolished from 6 April 2024 but was replaced with two new lump sum allowances. There is no longer a specific limit on how much pension savings you can build up.

The new allowances

The lump sum allowance (LSA) is set at £268,275. It limits the amount of tax-free cash you can take. The LSA is used up when a member takes payment of a relevant lump sum from a pension scheme (if a member takes a trivial commutation or small pots payment these will not impact the LSA). If you have a valid lifetime allowance protection the limit will be higher.

A relevant benefit crystallisation event (RBCE) takes place when a relevant lump sum is paid and a check against the new lump sum allowances is performed. Where a lump sum is paid in excess of the new allowance it will be taxed at your marginal income tax rate.

Types of lump sums that will be tested against the LSA:

• a pension commencement lump sum (PCLS)
• an uncrystallised funds pension lump sum (UFPLS)
• a stand-alone lump sum (SAL)

​The lump sum and death benefit allowance (LSDBA) is set at £1,073,100. It limits the amount of tax-free cash that can be taken by an individual and paid in respect of them when they die. On payment of a relevant death benefit lump sum the LSDBA will be used to check if the total of any relevant lump sums mentioned above plus any relevant death benefit lump sums exceed the LSDBA limit. Lump sums paid in excess of the LSDBA will be taxed at your (or your beneficiary's) marginal income tax rate.

Types of lump sums that will be tested against the LSDBA:

• a pension commencement lump sum (PCLS)
• an uncrystallised funds pension lump sum (UFPLS)
• a stand-alone lump sum (SAL)
• a serious ill health lump sum (under 75)
• a relevant lump sum death benefit
• the payment of a defined benefit lump sum death benefit (DBLSDB)

If an individual is certified as having a life expectancy of less than one year, provided certain conditions are met, a serious ill health lump sum (SIHLS) can be paid. In England and Wales, a SIHLS is only payable in respect of members who left the scheme before 1 April 2008.

Transitional tax-free amount certificates (TTFAC)

A transitional tax-free amount certificate (TTFAC) accurately reflects the relevant tax-free lump sums paid to an individual before 6 April 2024. Most members should not need to apply for a TTFAC as applying the standard transitional calculation will accurately reflect any tax-free lump sums taken by the member at a benefit crystallisation event (BCE).

Members, or their personal representatives if they have died, may wish to apply for a TTFAC if they have taken less than 25 per cent of their LTA as tax-free lump sums. Members can apply to any pension scheme they are a member of for a TTFAC. HMRC has stated individuals may wish to apply to the scheme they crystallised the majority of their pension before 6 April 2024 with, or to the scheme paying the first RBCE after 5 April 2024. A member cannot apply for a TTFAC if they have already had an RBCE nor can they make an application to a scheme they are not yet a member of.

Members who have a pre-commencement pension only cannot apply for a TTFAC. Members who have a pre-commencement pension and had a BCE (between 6 April 2006 and 5 April 2024) can apply for a TTFAC.

Who should consider applying for a TTFAC?

• Members who reached age 75 but did not take their pension
• Members who have taken a QROPS before 6 April 2024
• Members who received a SILHS before 6 April 2024
• Personal representatives of a deceased member if they have died, may wish to apply for a TTFAC if they have taken less than 25 per cent of their LTA as tax-free lump sums, and the amount of tax-free lump sum(s) they can take is likely to be limited by the LSA and/or LSDBA
• If you received payment of a pension or lump sum before 6 April 2024 but have taken less than 25 per cent of your LTA as tax-free lump sum.

Who should not apply for a TTFAC?

Members should not apply for a TTFAC where they believe this might result in lower available allowances than under the standard transitional calculation. This is because the legislation does not allow individuals to apply for a TTFAC to compare the results under each process. If a TTFAC is granted to a member, it must be used.

A TTFAC needs to be applied and issued before the first RBCE and an application may only be made once.