What is changing? 

The Government is replacing the  Lifetime Allowance (LTA) with three new allowances: 

 

1.   Lump Sum Allowance (LSA): this applies to tax-free lump sums you can take as part of your retirement. The LSA is set at £268,275. The maximum lump sum you can take when your pension commences is 25% of the value of your pension benefits being drawn, up to this limit. 

 

2.   Lump Sum and Death Benefit Allowance (LSDBA): this applies to any lump sums payable upon death or serious ill health. The LSDBA is set at £1,073,100. The total value of any lump death benefits paid out upon death cannot exceed this limit. 

 

3.   Overseas Tax Allowance (OTA): this applies to benefits paid to a Qualifying Recognised Overseas Pension Scheme (QROPS) following a transfer out of the Scheme. The OTA is set at £1,073,100.  This means any transfer value above this limit will be subject to a 25% overseas transfer charge. Please note transfers to UK-registered pension schemes are not affected. 

  

When are the changes taking effect? 

The new legislation is effective from 6 April 2024. 

 

How could this change affect you? 

For most members, there will be no change to the maximum tax-free cash they can take, the payment of any lump sum death benefits or transfers. The new limits are in line with the current LTA limits so the points at which you exceed, are broadly the same. 

 

What happens if you exceed the new allowances? 

The maximum lump sum you can take when your pension commences is a quarter of the value of your pension benefits being drawn. If this is greater than your available LSA, any lump sum you wish to take exceeding this will be subject to income tax at your marginal rate. 

 

Existing  LTA protections  will be maintained, and these will increase the new allowance level. 

 

Transitional Tax-Free Amount Certificate 

If you have drawn any pension previously, when calculating your lump sum allowance, 25% of the LTA you have already used will be taken into account. For most people, this standard calculation will be accurate and will reflect the amount of tax-free cash already taken. 

 

However, if you took less than the maximum tax-free cash when you drew benefits previously there will be an opportunity to apply for a ‘transitional tax-free amount certificate’ from the Scheme you are next taking a lump sum at retirement.  The certificate will adjust the calculation to reflect the correct amount of LSA available. 

 

The new rules do not allow a certificate to be given up once granted; this means that if you are better off under the standard calculation but applied for and received a transitional certificate, you could be in a worse position. You should, of course, take financial advice if you are unsure whether to apply for a certificate. 

 

Over the coming weeks, as more guidance from HMRC becomes available, we will continue to update our communications to reflect the new changes. In the meantime, further information can be found at www.GOV.UK