Abolishment of the lifetime allowance – What is changing from 6 April 2024?

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Lump Sum Allowance (LSA)

The LSA is set at £268,275 for the 2024/2025 tax year, unless the member has transitional protection. The LSA limits the amount of tax-free lump sums that an individual may receive from all registered pension schemes during their lifetime.

These lump sum payments will also count towards an individual’s Lump Sum and Death Benefit Allowance (LSDBA) and include lump sums such as:

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

Any lump sums in excess of the LSA are subject to income tax at the member’s marginal rate.

Lump Sum and Death Benefit Allowance (LSDBA)

The LSDBA limits the amount that can be taken as a tax-free lump sum payable from all of an individual’s registered pension schemes, over a member’s lifetime or following death before age 75. The LSDBA is set at £1,073,100 for the 2024/2025 tax year, unless a member holds transitional protection.

The lump sums that are tested against the LSDBA include:

  • 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

Any lump sum taken during the member’s lifetime which is within the LSA is tax-free.

If the member passes away before age 75, lump sum death benefits would be tax free if paid within 2 years of the notification of death up to the member’s remaining LSDBA. If the member passes away after age 75, all lump sums would be liable to income tax at the beneficiaries’ marginal income tax rate.

Overseas Transfer Allowance (OTA)

The OTA is a limit on transfers to a qualifying recognised overseas pension scheme (QROPS). The OTA for the 2024/2025 tax year is £1,073,100. If a member exceeds this allowance, they will be subject to an overseas transfer charge of 25%.

Some transfers to a ROPS may already be subject to a 25% overseas transfer charge. 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

Where an overseas transfer does not meet the exclusion requirements above, the entire transfer value will be subject to an overseas transfer charge of 25% and will not reduce the OTA.

Transitional arrangements

A Transitional Tax-Free Amount (TTFA) Certificate is provided by a registered pension scheme, following receipt of complete evidence, to show an individual’s lump sum transitional tax-free amount and lump sum and death benefit tax-free amount.

An individual, or a personal representative, can apply for a TTFA certificate from a registered pension scheme where the individual is a member or, if the individual is deceased, of which the individual was a member immediately before death.

In order to obtain a TTFA, the applicant will need to provide complete evidence of any lump sums or lump sum and death benefits in respect of any pension the client has been a member of. The scheme administrator will use this evidence to determine the client’s transitional lump sum tax-free amount and transitional lump sum and death benefit tax-free amount and issue a certificate, or decline the application.