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How will the changes to the Lifetime Allowance (LTA) / the introduction of the Lump Sum Allowance (LSA) affect my clients?

  • Updated

In Spring 2023, the Government announced it will abolish the Lifetime Allowance (LTA) from 6th April 2024.

A further announcement was made confirming that the Lifetime Allowance is being replaced by three new allowances.

1. The Lump Sum Allowance - £268,275

This is the standard allowance and currently there are no provisions to increase this amount. If a client has LTA protections, they will receive an LSA based on their protected LTA.

The LSA will reduce based on any relevant BCE that occur or have occurred. These include:

  • a pension commencement lump sum (PCLS)
  • serious ill health lump sum (SIHLS)
  • an uncrystallised funds pension lump sum (UFPLS)
  • a trivial commutation lump sum (TCLS)
  • a winding-up lump sum (WULS)

Only the non-taxable amounts of the above lump sums are deducted from the allowance. For example, if a £100,000 UFPLS is taken and £25,000 of that was non-taxable, £25,000 of the LSA will be used.  

Any PCLS payable from the 5th April 2024 will include LSA in the calculation.

Transitional allowance usage

One of the key parts of the new rules is how to account for previously used LTA. This will be a standard calculation based on the 'lifetime allowance previously used amount' (assuming they had a benefit crystallisation event on 5th April 2024).

The LSA reduces by 25% of the previously used amount. So, if 100% of the LTA was used, the lump sum allowance is Nil.  

If 50% of the LTA was used, the amount of LSA used will be: 

50% x £1,073,100 x 25% = £134,137.50 

2. The Lump Sum & Death Benefit Allowance - £1,073,100

The standard allowance will be £1,073,100 with no provision to increase. Those with old LTA protections will have a LSDBA based on their protected LTA.

The LSDBA will reduce based on any relevant benefit crystallisation amounts that occur or have occurred.  The amount of relevant benefit crystallisation amounts is wider than that reducing the LSA. These are the aggregate of:

  • the non-taxable amount in relation to each authorised lump sum (if any) to which the individual was entitled, and
  • the non-taxable amount relating to each authorised lump sum death benefit (if any) in respect of the individual to which any person has previously become entitled 

The lump sum death benefits are:

  • Uncrystallised funds lump sum death benefit (UFLSDB) 
  • Defined benefit lump sum death benefit (DBLSDB) 
  • Pension protection lump sum death benefit (PPLSDB) 
  • Annuity protection lump sum death benefit (APLSDB) 
  • Flexi-Access drawdown lump sum death benefit (FADLSDB) 
  • Drawdown pension fund lump sum death benefit (DPFLSDB) 
  • Trivial commutation lump sum death benefit (TCLSDB) 

TCLSDB is taxed as pension income at the recipient’s marginal rate of tax. The tax payable on the remaining lump sum death benefits depends on the member’s age at death and whether it’s paid to a qualifying or non-qualifying person. 

  • When a member dies aged under 75 and the payment is made to a qualifying person or non-qualifying person it’s normally tax-free (if paid within 2 years). For payments to non-qualifying persons (such as a trust or charity) it’s subject to a 45% tax charge known as the special lump sum death benefit charge (SLSDBC) 
  • When a member dies aged over 75 and the death benefit is paid to a qualifying person it’s taxed as pension income 
  • When the member dies aged over 75 and the death benefit is paid to a non-qualifying person (trust or charity) it’s always subject to the SLSDBC 45% tax charge 

On the members death, their remaining LSDBA less any LSA used can pay out as an authorised lump sum death benefit. Benefits under the LSDBA are tax free, while benefits above the LSDBA are taxable at the recipients marginal rate of tax.

3. The Overseas Transfer Allowance - £1,073,100

With the LTA removed, a new overseas transfer allowance is introduced which is the same as the individuals lump sum allowance and death benefit allowance.

Any payments more that the individuals LSA or LSDBA to a QROPS (qualifying recognised overseas pension scheme) will be subject to a 25% overseas tax charge (OTC). Where there's no LSA or LSDBA, the full payment will be subject to the OTC of 25%.

Transitional tax-free amount certificates 

These are certificates provided by a registered pension scheme to prove the scheme member is entitled to a lower LSA and LSDBA reduction that the standard calculation. The certificate confirms the:

  • 'Lump sum transitional tax-free amount' - the total PCLS and tax-free amounts of UFPLS paid before 6 April 2024 
  • 'Lump sum and death benefit transitional tax free amount' - the total amount of tax-free lump sums paid before 6 April 2024 - including serious ill health lump sums and lump sum death benefits paid

A certificate:

  • Must be applied for by the client, or the clients personal representatives if they've died 
  • Can be applied for from any scheme in which the individual is a member (or was immediately prior to death)
  • Must be supplied with complete evidence of previous amounts paid
  • Must be made prior to the first RBCE. Until the certificate is received, no RBCSs can take place. 

The scheme administrator has three months to supply the certificate or state why they refused to issue a certificate. If a scheme administrator believes a certificate is incorrect, they must notify the client, or their personal representative, that it's cancelled. 

This is the only circumstance where a certificate can be cancelled. For example, a certificate cannot be cancelled if, on receipt, a client finds their available lump allowances under the standard calculation would have been made more beneficial.