Up to 5th April 2023 the lifetime allowance (LTA) was the total amount you could build up in all your pension savings without incurring a LTA tax charge. … So, effectively, your lifetime allowance determined the amount of benefit you could accrue before you had to pay an additional tax on either pension income or lump sums when received.
For the 2023/24 tax year the Lifetime Allowance was still set at £1,073,100 although the charge was removed. Taxation of any lifetime allowance excess lump sum, serious ill-health lump sum, defined benefits lump sum death benefit and uncrystallised funds lump sum death benefit above the lifetime allowance changed from a 55% tax charge to taxation at an individual’s marginal rate of income tax.
From 6 April 2024, a new Lump Sum Allowance (‘LSA’) has been introduced, which is a monetary amount, set at 25% of the abolished Lifetime Allowance (equating to £268,275).
There is also a new tax-free Lump Sum and Death Benefit Allowance (‘LSDBA’) again detailed as a monetary value and set at the same level as the abolished Lifetime Allowance, £1,073,100 (covered later).
Any Pension Commencement lump Sum (PCLS) or tax-free parts of an Uncrystallised Funds Pension Lump Sum (UFPLS) will be tested against the £268,275 LSA. Any lump sum more than this allowance will be subject to income tax.
For pension benefits already drawn known as crystallisation, a transitional calculation will be completed to work out the available allowance and individuals who hold LTA transitional protections will maintain their protection and be entitled to an increased LSA and LSDBA. LTA transitional protections include Enhanced Protection, Primary Protection, Fixed Protection and Individual Protection. It’s still possible to apply for Fixed or Individual Protection 2016 until 5th April 2025 (Individual Protection is only available to those with pension savings in excess of £1,000,000 on the 5th April 2016 and, for those newly applying, Fixed Protection requires that there is no further pension funding after 5th April 2016).
The LSA is calculated by deducting the previously used amount as of 5th April 2024. As a default the previously used amount is 25% of LTA used, or the monetary amount stated on the Transitional Tax-free amount certificate (TTFAC) value if the individual applies for this (see later).
In the event the individual has used all their LTA the default position is the LSA and LSDBA will be set to zero.
There will no longer be what was known in the industry as Benefit Crystallisation Events when accessing income or lump sums from pension arrangements. There will now however be ‘relevant Benefit Crystallisation Events’ which will be in relation to lump sums taken only.
For the NHS Pension Scheme this is simply related to the amount of lump sums taken during the individual’s lifetime and lump sum death benefits taken from the scheme.
For those with private defined contribution pensions the Pension Commencement Lump Sum (PCLS) entitlement is determined by 1/3 of the amount used for income (the same as saying 25% of the fund).
For example, if you have a £100,000 pension fund and place £75,000 into income drawdown, the maximum PCLS will be 1/3rd of £75,000 = £25,000. Below are some examples of how this works.
Lump Sum Allowance (LSA) – Example One for Dr Jones
Dr Jones commenced her 1995 NHS pension scheme receiving £30,000pa pension and £90,000 PCLS in the tax year 2023/24. (The defined benefit calculation to establish how much of the lifetime allowance has been used is annual pension x 20 plus the lump sum. (£30,000 x 20) + £90,000 = £690,000. This equates to 64.29% of Dr Jones Lifetime Allowance of £1,073,100.
Dr Jones has a personal pension valued at £600,000 in 2024/25 and decides to take £50,000 PCLS designating £150,000 to income via Drawdown.
Based on this scenario Dr Jones has £45,801 LSA remaining as illustrated below which can be taken from the remaining £400,000 uncrystallised funds from her personal pension:
| Allowance | £268,275 |
| Previously Used Amount 25% x (64.29% x £1,073,100) | £172,474 |
| LSA remaining after NHS Pension taken with standard lump sum | £95,801 |
| Personal Pension PCLS | £50,000 |
| LSA remaining | £45,801 |
Lump Sum Allowance (LSA) Example Two for Dr Jones
Dr Jones commenced her 1995 NHS pension scheme taking the maximum lump sum. This gave her a pension of £24,108pa and £160,714 PCLS in the tax year 2023/24. Using the same calculation as above this used up 59.9% of her Lifetime Allowance of £1,073,100.
As above Dr Jones has a personal pension valued at £600,000 in 2024/25 and decided to take £50,000 PCLS designating £150,000 to income via Drawdown.
Based on this scenario Dr Jones has £57,579 LSA remaining. This gives an increase in remaining LSA of £11,778 over example one by taking the Maximum PCLS from her NHS Pension benefits as illustrated below:
| Allowance | £268,275 |
| Previously Used Amount 25% x (59.9% x £1,073,100) | £160,696 |
| LSA remaining after NHS Pension taken with maximum lump sum | £107,579 |
| Personal Pension PCLS | £50,000 |
| LSA remaining | £57,579 |
Transitional Tax-Free Amount Certificate (TTFAC)
This will be beneficial for certain categories of individuals including those who have not taken maximum PCLS previously, individuals who crystallised benefits when the LTA was below £1,073,100 or those individuals who have used up their LTA and wish to regain some of the LSA and LSDBA. The scheme needs to be satisfied with the amount of LSA and LSDBA that has been used with regards to benefits already taken.
- The application can be made by the individual or their personal representatives and needs to be made prior to the first Relevant Benefit Crystallisation Event (RBCE) post 5th April 2024.
- The transitional tax-free amount certificate confirms the monetary amount of PCLS used previously.
- To apply for a transitional tax-free amount certificate, full records of the previous PCLS, and other tax-free payments received along with the percentage of the LTA used will be required.
- Assuming all relevant information is provided the tax-free amount certificate will be issued by the registered pension scheme when an application is made.
Lump Sum Allowance (LSA) Example Three for Dr Jones
Dr Jones Commenced her 1995 NHS pension scheme of £30,000pa pension and £90,000 PCLS in the tax year 2023/24. This used up 64.29% of her Lifetime Allowance of £1,073,100.
She still has the personal pension valued at £600,000 in 2024/25 and decided to take £50,000 PCLS designating £150,000 to income via Drawdown.
However, Dr Jones has applied for a Transitional Tax-Free Amount Certificate (TTFAC) which confirms the exact amount of the previously used PCLS of £90,000 as opposed to the 25% of 64.29% percentage of her Lifetime Allowance as used in example 1.
The calculation changes and Dr Jones will now be able to fully utilise her LSA as the calculation uses the actual previously used amount leaving a LSA remaining of £128,275 which is £82,474 more than example one without the TTFAC as illustrated below:
| Allowance | £268,275 |
| Previously Used Amount | £90,000 |
| LSA remaining after NHS Pension taken with standard lump sum | £178,275 |
| Personal Pension PCLS | £50,000 |
| LSA remaining | £128,275 |
With £400,000 uncrystallised from her personal pension, she will now be able to draw £100,000 as PCLS equalling 25% of the total fund whereas in example one she would have been restricted to £45,801 and in example two £57,579. With further growth or additional contributions, she could well be in a position at some point to utilise the entire LSA remaining.
It’s worth mentioning that if Dr Jones’ benefits had exceeded £1,000,000 in April 2016, she could apply for Individual Protection 2016 (IP16) (available until 5th April 2025) which would provide her with a higher LSA if her benefits on 5th April 2016 were valued at more than £1,073,100. She would need to obtain the value of her pensions on 6th April 2016 to confirm the value.
If we assume her benefits were valued over £1.25m at this point, it will increase her LSA to £312,500.
Lump Sum and Death Benefit Allowance (LSDBA)
An individual’s Lump Sum and Death Benefit Allowance (LSDBA) is set at £1,073,100 where transitional protection does not apply. This is the maximum tax-free lump sum beneficiaries can receive on an individual’s death, after deducting any tax free lump sums or serious ill-health lump sums taken by the individual during their lifetime.
The test against the LSDBA is only in relation to lump sum payments. Where an individual receives an income via a beneficiary Flexi-Access Drawdown (FAD)/annuity this will not be tested and remains tax-free where death occurs before age 75.
As a default the previously used amount is 25% of LTA used, or the monetary amount stated on the Transitional Tax-free amount certificate value if the individual applies for this. In the event the individual has used all their LTA the default position is the LSDBA will be set to zero.
Any tax-free lump sums already tested against the LSA are tested again against the LSDBA. In addition, any Serious Ill Health lump sums, or lump sum death benefits will also be tested against the LSDBA.
Any lump sum in excess of this allowance will be subject to the beneficiaries’ marginal rate of income tax. The allowance applies to death benefits up to age 75 and includes any lump sums paid in respect of survivor pensions via the NHS pension.
Any lump sum death benefits payable from a plan that was crystallised on or before 5th April 2024 will not be tested against the LSDBA.
The death lump sum must be claimed and paid within two years of your death otherwise it becomes taxable at the beneficiaries’ marginal rate of income tax.
With the removal of the Lifetime Allowance, there is now no cap on the benefits that can be paid from a private pension as an income via Beneficiary (Flexi-Access Drawdown) FAD/Annuity arrangements.
It’s so important that NHS and private pension arrangements meet your needs. The importance of an up-to-date Expression of Wishes (‘EoW’) on any private pensions you might have, cannot be overstated. Your expression of wish is a statement that states who you’d choose to receive your pension savings if you die before you retire. These are referred to as beneficiaries. What you write on the form is a key influence for trustees as they make a decision about releasing your savings.
Where no EoW exists the pension benefit could be paid into the estate as a lump sum where the trustees are unable to use their discretion, or an income via a beneficiary (FAD) may not be available from the pension arrangement and would therefore be fully tested against the LSBDA with any excess subject to tax.
The need for Advice
Individuals with Fixed or Enhanced Protection applied for before 15th March 2023 can now contribute to their pension without losing their protection. This may be particularly relevant to individuals who didn’t take their maximum lump sum, or who have suffered a pension debit.
The Annual Allowance increased to £60,000 in 2023/24 and individuals may have carry forward available from the previous 3 years.
Members of the NHS Pension scheme who do not wish to reduce their secure income to provide PCLS, or those who have already taken 100% of their Lifetime Allowance (LTA) but only received standard PCLS, could look to contribute to a pension in order to benefit from further PCLS.
For individuals who are likely to need to apply for the transitional tax-free amount certificate, it is wise to start to collate this information as soon as possible to avoid delays in applying for the certificate and accessing benefits.
Speak to your independent financial adviser where further advice is required.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.