Pension Lifetime Allowance Abolished

The New Regime: LSA and LSDBA

With the removal of the LTA, the government introduced two core controls to limit the cost of tax relief to the exchequer. These apply to "Relevant Benefit Crystallisation Events" (RBCEs).

1. Lump Sum Allowance (LSA) - £268,275

The Lump Sum Allowance limits the total amount of tax-free cash (Pension Commencement Lump Sum or PCLS) an individual can receive across all their registered pension schemes during their lifetime. The standard limit is set at £268,275. This figure represents 25% of the old LTA limit of £1,073,100.

Crucially, unlike the LTA, this figure is currently frozen and does not increase with inflation unless standard indexation is reintroduced in future budgets. If you take a lump sum exceeding this allowance, the excess is taxed at your marginal rate of income tax.

2. Lump Sum and Death Benefit Allowance (LSDBA) - £1,073,100

The LSDBA limits the total amount of tax-free lump sums that can be paid both during your lifetime and upon death (if death occurs before age 75). This limit is set at £1,073,100.

This allowance encompasses:

• Pension Commencement Lump Sums (PCLS)
• Uncrystallised Funds Pension Lump Sums (UFPLS) - specifically the tax-free element
• Serious ill-health lump sums
• Lump sum death benefits

Any lump sums paid in excess of this limit are subject to income tax at the recipient's marginal rate.

Transitional Tax-Free Amount Certificates (TTFAC)

For individuals who accessed pension benefits prior to April 6, 2024, a "standard transitional calculation" is automatically applied. This calculation assumes that 25% of the total Lifetime Allowance used previously was taken as tax-free cash.

However, this assumption is not always accurate. Some individuals may have taken less than 25% tax-free cash (for example, in Defined Benefit schemes with poor commutation factors). In such cases, the standard calculation artificially reduces your remaining Lump Sum Allowance.

The Solution: You can apply for a Transitional Tax-Free Amount Certificate. This certificate proves the actual monetary amount of tax-free cash taken previously. If this amount is lower than the default 25% assumption, a TTFAC will increase your remaining LSA and LSDBA.

Important: You must apply for a TTFAC before your first distinct "Relevant Benefit Crystallisation Event" (RBCE) after April 5, 2024. Once you trigger a new event without a certificate, you lose the right to apply for one.

Previous Protections: Fixed, Enhanced, and Primary

While the LTA is gone, the protections associated with it remain highly relevant because they dictate your personal LSA and LSDBA caps.

Enhanced Protection

If you hold valid Enhanced Protection, your LSA is capped at the value of your un-crystallised rights as of April 5, 2024 (subject to a maximum of £375,000 in most cases, though calculation nuances exist for rights held before 2006). Your LSDBA is generally the value of your uncrystallised rights on 5 April 2024.

Fixed Protections (2012, 2014, 2016)

Holders of Fixed Protection retain a higher LSA based on their protected LTA figure:

• FP 2012: LTA £1.8m -> LSA £450,000
• FP 2014: LTA £1.5m -> LSA £375,000
• FP 2016: LTA £1.25m -> LSA £312,500

Previously, contributing to a pension would lose you these protections. Under the new rules, you can contribute to a pension without losing the protection, provided the protection was applied for before March 15, 2023.

Overseas Transfer Allowance (OTA)

The Overseas Transfer Allowance is a new limit introduced to govern transfers to Qualifying Recognised Overseas Pension Schemes (QROPS). The OTA is set at the same level as your Lump Sum and Death Benefit Allowance (£1,073,100 for those without protection).

If you transfer pension funds overseas that exceed your available OTA, the excess is subject to an Overseas Transfer Charge (OTC) of 25%. This ensures that individuals cannot bypass the domestic tax limits simply by moving funds abroad.

Defined Benefit (DB) Schemes

For members of Defined Benefit (final salary) schemes, the abolition of the LTA simplifies administration but does not necessarily increase tax-free cash. DB schemes typically calculate tax-free cash by "commuting" a portion of the annual pension.

Most schemes use a commutation factor (e.g., 12:1), meaning for every £1 of annual pension you give up, you get £12 of cash. The new rules do not change these scheme-specific factors. Even if the LSA allows for £268,275, you can only take what the scheme rules permit. If the scheme rules allow a PCLS that exceeds the LSA, the excess is taxed as income.

The Annual Allowance Remains

It is vital to remember that while the Lifetime Allowance has been abolished, the Annual Allowance persists. For the 2025/2026 tax year, the standard Annual Allowance is £60,000. This is the limit on how much can be contributed to your pension each year (including employer contributions and tax relief) without a tax charge.

The Tapered Annual Allowance also remains for high earners. For every £2 of adjusted income over £260,000, the Annual Allowance is reduced by £1, down to a minimum of £10,000.

Frequently Asked Questions