Lump Sum Allowance (LSA)

The Lifetime Allowance (LTA) was abolished from 6th April 2024 and replaced with three new allowances. The Lump Sum Allowance (LSA) limits the amount of certain lump sum payments that can be paid tax free to individuals. 

The LSA is the overall limit on the amount that can be paid tax free when certain lump sums are paid that are Relevant Benefit Crystallisation Events (RBCE). 

An individuals LSA is adjusted to take account of some tax free amounts that were paid prior to 6th April 2024.

It is then reduced when any RBCE’s occur. 

RBCEs are defined for the LSA as being a “relevant lump sum”, these are;

(i) a pension commencement lump sum (PCLS),

(ii) an uncrystallised funds pension lump sum (UFPLS),

(iii) a standalone lump sum (SALS)

It is only the non-taxable amount of the above lump sums that are deducted from the allowance

"Small Pot" does not need LSA to be paid and does not use up LSA.

Any amount of lump sum paid that is in excess of the LSA will be taxed at the individual's marginal rate of tax.

The standard allowance is £268,275, the same as the old maximum tax free cash under the LTA regime. There are no provisions for increasing this allowance.

Those with LTA protections will have a LSA based on their protected LTA.

For anyone who has used 100% of the Lifetime Allowance their allowance is £0. They may be able to get some LSA back if they meet the conditions for a Transitional Tax Free Amount Certificate.

If an individual with Enhanced Protection becomes entitled to a Serious Ill Health Lump Sum after 5th April 2024 then their LSA becomes £0.

Where an individual becomes entitled to benefits before Normal Minimum Pension Age then the allowance is reduced by 2.5% for each year early entitlement rises.

Further information about the LSA can be found on the Enhanced Protection and Primary Protection pages.

The standard LSA will need to be reduced at the first RBCE after 5th April 2024 to take into account benefits taken under the LTA regime. For those with Primary / Enhanced Protection with protected lump sum rights then see the Enhanced Protection and Primary Protection pages.

This initial deduction depends on circumstances. There are three different basis.

This basis is used for those who had benefits tested under the Lifetime Allowance regime and do not hold a Transitional Tax Free Amount Certificate.

The deduction is 25% of the amount of LTA used at 5th April 2024. 

As originally enacted the age 75 BCE tests were included in the LTA previously used amount. Subsequent legislation introduced in November 2024 altered this. 

Where a member has had an age 75 BCE test (which would not have produced tax free amounts) AND they did not take any further lump sum amounts between age 75 and 6th April 2024, the age 75 BCE can be ignored. 

The individual will still go through the standard transitional calculation, and at the point they want to crystallise further benefits the scheme will contact the individual to ask if they have accessed further lump sums after age 75 and before 6th April 2024. If they haven’t, the standard calculation can be used disregarding any percentage amount crystallised by an age 75 BCE.

If the individual has taken further lump sums between turning 75 and 6th April 2024, the BCE used at age 75  is still taken into account, and the individual can apply for a TTFAC if appropriate/eligible.

This basis is used where an individual has a Transitional Tax Free Amount Certificate .

The certificate will show a lump sum transitional tax free amount reflecting the actual tax free amounts paid prior to 6th April 2024.

The deduction will be the lump sum transitional tax free amount shown on the certificate. 

More information can be found in our Transitional Tax Free Amount Certificates page.

This basis is used where an individual first took benefits prior to the introduction of the LTA on 6th April 2006 and did not have a benefit crystallisation event between 5th April 2006 and 6th April 2024. 

The deduction is 25% of the capitalised value of the individuals pension in payment immediately prior to the first RBCE. 

Scheme pensions and annuity payments are valued by multiplying the annual rate of pension payable by 25.

Drawdown plans are valued as follows : 

• Capped drawdown, 25 times 80% of the maximum amount that may be paid in the drawdown pension year, or
• where the individual was in Flexible Drawdown prior to 6th April 2015, 25 times 80% of the maximum amount that could have been paid in the drawdown pension year in which they accessed flexible drawdown, or
• where a drawdown fund was converted to a flexi access drawdown fund, 25 times 80% of the maximum amount that could have been paid in the drawdown pension year in which the conversion occurred had no conversion happened. 

The lump sum allowance is reduced initially to take account of any benefits taken prior to 6th April 2024.

Thereafter it is reduced by the tax free amounts paid at any Relevant Benefit Crystallisation Events. 

The deduction is a monetary amount and depends on the type of payment and the individuals protection status.