If you’ve built up a substantial pension over the years or started accessing your pension benefits before April 2024, there are important changes you need to be aware of. The Lifetime Allowance (LTA) has officially been abolished, but that doesn’t mean all limits are gone.
In fact, the new rules introduce three new allowances, and if you’re not careful, you could miss out on valuable tax-free entitlements or end up paying more tax than necessary.
We sat down with Sarah Arora, Independent Financial Adviser here at Flying Colours, to talk about what’s changed, how it affects you, and what you may need to do next.
What was the Lifetime Allowance (LTA)?
The Lifetime Allowance was a limit on the total value of pension savings you could have built up without facing extra tax charges. It applied across all your registered pension schemes and included any defined benefit and defined contribution pensions.
Sarah says “Until April 2024, if you exceeded the LTA, you faced an additional tax charge when you accessed your pension. The LTA also capped the amount you could take tax-free, which was usually 25% of your pension pot.”
The LTA and the associated tax charge have been removed and replaced with three new allowances, with effect from 6th April 2024.
The three new pension allowances
The three new pension allowances are:
- The Lump Sum Allowance (LSA),
- The Lump Sum and Death Benefit Allowance (LSDBA), and
- The Overseas Transfer Allowance (OTA).
Lump Sum Allowance (LSA)
Sarah tells us “The LSA is the total amount you can take as tax-free cash from your pension during your lifetime, across all of your registered pension schemes combined. This is capped at £268,275 for most people, equivalent to 25% of the previous LTA. Even if your pension pot grows larger than this, your tax-free lump sum entitlement doesn’t increase.”
Lump Sum and Death Benefit Allowance (LSDBA)
“The LSDBA is capped at £1,073,100. It covers all tax-free lump sums paid either during your lifetime or after your death, if you die before age 75.” says Sarah.
These lump sums can include:
- Pension Commencement Lump Sums,
- Tax-free elements of your Uncrystallised Funds Pension Lump Sum,
- Serious ill-health lump sums, or
- Death benefits paid to beneficiaries, if you die before age 75 (if paid within two years).
Sarah reminds us that “your pension becomes crystallised when you decide to take a tax-free lump sum from it, buy an annuity, or set up a drawdown scheme.”
Overseas Transfer Allowance (OTA)
Sarah says “The OTA also has a limit of £1,073,100. It applies if you transfer your pension to a Recognised Overseas Pension Scheme (ROPS). If the value of the transfer exceeds this amount, a 25% overseas transfer charge will apply.”
What if I’ve already taken pension benefits?
If you accessed your pension before 6th April 2024, transitional rules apply to help calculate how much of your new allowances you have left.
Sarah says “By default, a standard calculation is used based on the percentage of the Lifetime Allowance (LTA) you had used up. This relates to the value of pension benefits you had already crystallised. However, you may benefit from applying for a Transitional Tax-Free Amount Certificate, which could result in a higher remaining LSA and LSDBA.”
When should you get a Transitional Tax-Free Amount Certificate (TTFAC)?
“You must apply for a TTFAC before you take any more tax-free cash,” Sarah notes. It’s particularly worth considering if you:
- Took pension benefits when the LTA was lower than £1,073,100,
- Took less than 25% tax-free cash from previous withdrawals, or
- Are over 75 and still have uncrystallised funds.
However, if you have taken any Pension Commencement Lump Sums (PCLS) since April 2024 then you will not be able to apply for TTFAC, so it is imperative you consider this before making any decisions.
How does this work in practice?
Here are three situations to illustrate how the new rules and transitional calculations could affect your tax-free lump sum entitlement.
Scenario 1: Olivia took no tax-free cash
Olivia started drawing a defined benefit pension in 2020 but didn’t take a tax-free lump sum. At the time, this used 80% of her LTA. She now has a personal pension worth £400,000 and wants to take tax-free cash.
- Standard calculation: 80% x £1,073,100 = £858,480 → 25% = £214,620 used. Remaining Lump Sum Allowance (LSA): £268,275 – £214,620 = £53,655
- With TTFAC: No previous cash was taken, so the full LSA of £268,275 is available. Therefore, she can take the maximum 25% Pension Commencement Lump Sum (PCLS) available with her personal pension £400,000 = £100,000
- Result: Olivia gains an extra £46,345 in tax-free cash by applying for a TTFAC. She also has £168,275 remaining of her LSA should she have other sources of pensions she would like to access in the future.
Scenario 2: Raj took full cash in 2018, when the LTA was lower than £1,073,100
Raj accessed his pension in 2018 when the LTA was £1,030,000, taking 25% tax-free cash. He used 60% of the LTA.
- Standard calculation: 25% x 60% x £1,073,100 = £160,965 used.
Remaining LSA: £268,275 – £160,965 = £107,310 - With TTFAC: Already took £154,500 tax-free cash
Remaining LSA: £268,275 – £154,500 = £113,775 - Result: Raj gains an extra £6,465 for his LSA using the TTFAC.
Scenario 3: Yasmin has individual protection
Yasmin used 45% of her LTA under IP2014, with no tax-free cash taken. She now holds £1.8m in uncrystallised funds.
IP2024 – Individual protection 2014 which gives a protected lump sum and death benefit allowance equal to the value of pension savings on 5 April 2014, up to a maximum of £1.5 million.
- Standard calculation: 25% x 45% x £1.5m = £62,025 used.
Remaining LSA: £268,275 – £62,025 = £206,250 - With TTFAC: With IP2014, PCLS is protected at £375,000. No cash has been taken yet.
- Result: Yasmin could access £375,000 in tax-free cash — an increase of £168,750 in her LSA using the TTFAC.
Making sense of the changes
The removal of the Lifetime Allowance (LTA) opens new opportunities for pension saving, but it’s also a timely moment to review your position.
Sarah suggests “if you’ve taken pension benefits in the past, consider reviewing previous withdrawals, checking your remaining allowances, and speaking to an adviser about whether applying for a TTFAC could help you maximise your tax-free cash. Remember it also introduces complexity, especially for those with existing arrangements or protections.”
Getting the right advice before making withdrawals is more important than ever. Whether you’re considering retirement, passing on your pension, or just want to make sure you’re not missing out on tax-free allowances, we can help.
Speak to a Flying Colours adviser to review your pension strategy and make confident, informed decisions.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.