Lifetime Allowance and LSAs

The Lifetime Allowance was a government-imposed limit on the total value of pension benefits you could build up without incurring an additional tax charge. It applied to the combined value of all your pension savings, including both defined benefit (final salary) and defined contribution pensions.

Before it was removed in April 2024, the pension lifetime allowance was set at £1,073,100. If your pension benefits exceeded this threshold, you could face tax charges of up to 55% on the excess, depending on how the benefits were taken.

The aim was to limit the tax advantages of pension saving for high earners. However, over time, more people were affected by it, including those who had enjoyed steady investment growth or long careers.

The Lifetime Allowance was replaced by two new measures introduced by HMRC – the Lump Sum Allowance (LSA) and the Lump Sum & Death Benefit Allowance (LSDBA). From April 2024, these two allowances determined how much of your pension could be paid tax-free:

Lump Sum Allowance (LSA)

The Lump Sum Allowance caps the total amount of tax-free cash you can take from your pension funds during your lifetime. The standard limit is £268,275, which is 25% of the previous LTA.

Lump Sum & Death Benefit Allowance (LSDBA)

Lump Sum & Death Benefit Allowance applies when benefits are paid out on death before age 75. The limit is £1,073,100 (like the old LTA) and controls how much of those payments can be made tax-free to beneficiaries.

Both limits work together to maintain fairness while removing the tax charges that previously applied.

How these caps work in practice

Under the new system, when you take benefits from your pension, the amount of tax-free cash you withdraw is deducted from your Lump Sum Allowance. Once you’ve reached that limit, any further withdrawals will be taxed as income.

Similarly, if you die before age 75, the Lump Sum & Death Benefit Allowance ensures your beneficiaries can receive payments up to that limit tax-free. Anything above that amount may be taxable at their marginal rate.

Example scenarios

Example 1: Taking a standard tax-free lump sum

Sarah has a £800,000 pension pot. She decides to take 25% (£200,000) as tax-free cash. That amount is deducted from her Lump Sum Allowance, leaving £68,275 available if she accesses another pension later.

Example 2: Exceeding the Lump Sum Allowance

John has multiple pensions and has already taken £268,275 tax-free in total. When he accesses a new pension, he must pay income tax on all withdrawals, as he has reached his Lump Sum Allowance limit.

Example 3: Lump sum on death

Emma dies at age 70 with a £900,000 pension pot. Her beneficiaries can receive this amount tax-free as it’s below the Lump Sum & Death Benefit Allowance of £1,073,100.

The removal of the Lifetime Pension Allowance simplifies retirement planning for most people, but the new rules still bring a few important points to be aware of.

Differences between defined contribution vs defined benefit pensions

Defined contribution (DC) pensions are affected when you withdraw tax-free cash or income, as these payments count towards your Lump Sum Allowance.

Defined benefit (DB) pensions are tested when benefits first come into payment. The value used to calculate your LSA is typically 25% of the scheme’s assessed value.

Complications for those who have already taken benefits

If you accessed your pension before April 2024, transitional calculations apply. HMRC will convert your previously used Lifetime Allowance into equivalent values for the new LSA and LSDBA. Those with LTA protection (e.g. Fixed, Enhanced or Individual Protection) may have higher limits than the standard £268,275.

Common misunderstandings and HMRC clarifications

• You can’t “reset” your Lump Sum Allowance by transferring pensions.

• The 25% rule applies cumulatively across all schemes, not per provider.

• Taking small pots (under £10,000) does not reduce your LSA.

• Death after age 75 is taxed as income for the recipient, regardless of the LSDBA.