The lump sum allowance, lump sum death benefit allowance, and overseas transfer allowance

As of 6 April 2024, significant changes have been introduced to the UK pension landscape.

The lifetime allowance (LTA), which previously controlled the maximum you could save into your pension without paying tax, has been abolished. In its place, three new allowances have emerged. Find out what these new allowances mean for your retirement savings.

The lump sum allowance (LSA)

The lump sum allowance (LSA) is the 25% of your pension you can take tax-free. The LSA is also known as ‘tax-free cash’ or ‘pension commencement lump sum (PCLS)‘ and is set at a maximum of £268,275. This determines the maximum tax-free cash that can be paid to an individual from their pension(s) once they reach age 55 (rising to 57 from 2028). If you have £1,073,100 or more saved in pensions, £268,275 is the most you can take tax-free.

The untaxed portion of an uncrystallised funds pension lump sum (UFPLS) is deducted from the LSA, leaving the income part subject to the individual’s marginal income tax rate. It’s worth noting, this allowance is per person, not per scheme.

The lump sum and death benefit allowance (LSDBA)

The lump sum death benefit allowance is set at £1,073,100 and covers both tax-free lump sum benefits received during an individual’s lifetime and death benefits. Payments of PCLS and the untaxed portion of an uncrystallised funds pension lump sum (UFPLS) reduces an individual’s LSDBA, as does the payment of a serious ill health lump sum. Then when an individual passes away, any payments made to their beneficiaries will further reduce this. If an individual passes away before the age of 75, death benefits up to £1,073,100 are paid tax-free to the beneficiaries. Any death benefits payments made in excess of the LSDBA limit will be taxed at the beneficiaries’ marginal rate of income tax.

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Below is a list of all benefit payments which reduce the LSDBA. Whether these are payment options during an individual’s lifetime will depend on the individual’s circumstances and their pension product.

Lump sum benefits

  • Standard PCLS - the amount paid;
  • PCLS with scheme specific lump sum protection - the total PCLS paid;
  • Stand-alone lump sum - the total amount of the lump sum;
  • UFPLS - the non-taxable amount; and
  • Serious ill health lump sum - the full amount.

Death benefits

  • Defined benefit lump sum death benefit;
  • Uncrystallised lump sum death benefit;
  • Annuity protection lump sum death benefit;
  • Pension protection lump sum death benefit; and
  • Drawdown/flexi-access drawdown lump sum death benefit.

The overseas transfer allowance (OTA)

The overseas transfer allowance (OTA), also set at £1,073,100, regulates the tax treatment of transfers to qualifying recognised overseas pension schemes (QROPS). Transfers exceeding the OTA will incur a 25% overseas transfer charge on the excess amount. The overseas transfer charge may also apply to funds within the OTA if certain exclusion conditions are not met. In contrast to the LTA, the OTA is an entirely separate allowance so certain payments, such as taxable pension income and lump sum death benefits paid after age 75, fall outside the OTA assessment.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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