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Pensions

Lump Sum Allowance (LSA)

Last Updated: 6 Apr 24 10 min read

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. 

Contents

1. Key Points

2. What is the Lump Sum Allowance?

3. What level is the Lump Sum Allowance?

4. How do you take account of benefits taken before 6th Apri 2024? 

5. How is the Lump Sum Allowance reduced?

Key Points

  • The standard starting LSA is the same as the standard maximum PCLS under LTA rules
  • An initial deduction is made to account for benefits taken under the LTA
  • The LSA is then reduced by Relevant Benefit Crystallisation Events

What is the Lump Sum Allowance (LSA)?

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

For the avoidance of doubt a "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.

What level is the Lump Sum Allowance?

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 Helath 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.

 

Protection Type

Lump Sum Allowance
No Protection £268,275
Fixed Protection 2012 £450,000

Fixed Protection 2014

 £375,000
Individual Protection 2014

Between £312,500 and £375,000

(25% of relevant amount)

Fixed Protection 2016

 £312,500
Individual Protection 2016

Between £268,275 and £312,500 

(25% of relevant amount)

Primary Protection

(with protected tax free cash)

 Dependent on circumstances

Primary Protection

(no protected tax free cash)

 £375,000

Enhanced Protection

(with protected tax free cash)

 Dependent on circumstances

Enhanced Protection

(no protected tax free cash)

 £375,000

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

How do you take account of benefits taken before 6th April 2024?

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.

Standard Transitional (Default)

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. 

Example 

Roy does not have any protections.

He took PCLS and drawdown in June 2016 using up 40% of the LTA which was £1 million at the time.

His default deduction is £40% x £1,073,100 x 25% = £107,310.

Roy's initial LSA available is therefore £268,275 - £107,310 = £160,965

Transitional Tax Free Amount Basis

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.

Example

Roy's available LSA on the standard transitional basis is £268,275 - £107,310 = £160,965

He took PCLS and drawdown in June 2016 using up 40% of the LTA which was £1 million at the time. His actual PCLS was only £100,000.

Roy successfully applies for a transitional tax free amount certificate

His initial LSA of £268,275 is now reduced by £100,000 meaning his available LSA is increased to £268,275 - £100,000 = £168,275 

Pre-commencement Pensions Basis

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 aggregate 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:

  • 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, 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, 80% of the maximum amount that could have been paid in the drawdown pension year in which the conversion occurred had no conversion happened. 
Example 

Sandi has a scheme pension in payment of £32,000 a year and is about to have her first RBCE after 5th April 2024. She has no protection.

25 x £32,000 is £800,000. Her initial deduction from her LSA is £800,000 x 25% = £200,000

Her available LSA is £268,275 - £200,000 = £68,275 

How is Lump Sum Allowance reduced? 

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. 

Standard PCLS
The whole amount of the lump sum that is deducted.
For example, if £100,000 is placed in drawdown and £25,000 PCLS is taken the allowance is reduced by £25,000
Scheme specific protected tax free cash
The deduction to be made is 25% of the amount crystallised.
For example, if benefits of £200,000 are taken with £100,000 PCLS then the LSA reduction is £200,000 x 25% - £50,000 NOT the £100,000 paid.
UFPLS
The “non-taxable amount” is deducted. 
For example, if an UFPLS of £10,000 is taken with 25% tax free then the deduction is £10,000 x 25% - £25,000. NB the non taxable amount of an UFPLS paid to individuals after 5th April 2024 could be less than 25% 
Standalone Lump Sum
The deduction is 25% of the lump sum paid unless the member has Primary or Enhanced Protection where the deduction is 100% of the tax free amount of the lump sum paid.
For example, a SALS of £200,000 is paid and £180,000 of it is tax free. The deduction where there is no Enhanced or Primary Protection is 25% x £200,000 - £50,000. For this with Enhanced or Primary Protection the deduction is £180,000.

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