What is replacing the lifetime allowance from 6 April 2024?

Published  01 March 2024
   18 min read

This article is based on our understanding of the Finance Act 2024 and other supplementary documents, such as HMRC newsletters.

What changes are being made?

The lifetime allowance charge was removed from 6 April 2023 - the legislation for this was included in the Finance (No.2) Act 2023. However for the 2023/24 tax year all existing rules for calculating pension commencement lump sums remain and lifetime allowance checks still need to be done at benefit crystallisation events. More information on the 6 April 2023 changes can be found in our article Lifetime allowance changes for 2023/24.

From 6 April 2024, the lifetime allowance is being removed. This doesn’t mean there are no limits on the amount of pension savings people can take without a tax charge; the lifetime allowance is being replaced by new allowances.

What will replace the lifetime allowance?

The lifetime allowance is being replaced with three different allowances:

  • the lump sum allowance - £268,275
  • the lump sum and death benefit allowance - £1,073,100

Both of these allowances limit the amount of tax-free benefits that can be paid.

There is also:

  • the overseas transfer allowance - £1,073,100

A check is made against these allowances when benefits are paid.

These allowances may be higher if the individual has lifetime allowance protection.

Does the removal of the lifetime allowance and charge change everything?

No, the changes being made by the Finance Bill remove the lifetime allowance and make the necessary changes to remove the lifetime allowance charge and make other alterations to allow the legislation to function appropriately.

For example, the rules around the calculation of the tapered annual allowance remain unaltered, taxable lump sums death benefits are still included in that calculation. However, the legislation regarding the taxation of the lump sum death benefits now references a different part of taxation legislation.

When do you test benefits against the lump sum allowance?

The lump sum allowance applies at a relevant benefit crystallisation event, which is when tax-free benefits are taken. Any amount of pension commencement lump sum or the untaxed part of an uncrystallised funds pension lump sum is deducted from this allowance, £268,275. The remaining amount, the income part, is taxed at the individual’s marginal rate of income tax.

When do you test benefits against the lump sum and death benefit allowance?

The lump sum death benefit allowance applies at a relevant benefit crystallisation event, when someone dies or on the payment of a serious ill-health lump sum. It is important to remember most tax-free benefits paid during the individual’s lifetime are also deducted from this allowance. There are some exceptions, see Are there any benefits that are not tested against the two allowances? section below.

What is a relevant benefit crystallisation event (RBCE)?

It is important to note, that despite using similar words, relevant benefit crystallisation events are very different from pre-6 April 2024 benefit crystallisation events.

Pre-6 April 2024, benefit crystallisation events related to benefits, taxable and tax-free, being taken in a specific way and time which resulted in the individual’s lifetime allowance being used up.

Post 5 April 2024, a relevant benefit crystallisation event relates solely to the tax-free element of the benefits being taken. There are no relevant benefit crystallisation events for taxable pension income.

The definition of relevant benefit crystallisation event depends on whether you are looking at the lump sum allowance or the lump sum death benefit allowance.

Lump sum allowance (LSA)

For the lump sum allowance a relevant benefit crystallisation event in relation to an individual, is defined as, the individual becoming entitled to:

  • a pension commencement lump sum, or
  • an uncrystallised funds pension lump sum

Lump sum and death benefit allowance (LSDBA)

For the lump sum death benefit allowance a relevant benefit crystallisation event in relation to an individual is defined as:

  • the individual becoming entitled to a relevant lump sum, or
  • a person being paid a relevant lump sum death benefit in respect of the individual

A relevant lump sum is defined as:

  • a pension commencement lump sum
  • a serious ill-health lump sum, or
  • an uncrystallised funds pension lump sum

A relevant lump sum death benefit means any authorised tax-free lump sum death benefit other than:

  • a charity lump sum death benefit, or
  • a trivial commutation lump sum death benefit

What benefits are included in the two allowances?

Although both allowances relate to tax-free benefits, what counts towards them is different.

The lump sums tested against the lump sum allowance during the individual’s lifetime include:

  • pension commencement lump sums
  • the tax-free elements of any uncrystallised funds pension lump sum

The tax-free lump sums tested against the lump sum and death benefit allowance include:

  • Pension commencement lump sums and the tax-free elements of any uncrystallised funds pension lump sum.
  • Uncrystallised funds lump sum death benefits.
  • Drawdown pension fund lump sum death benefits and flexi-access drawdown lump sum death benefits from benefits crystallised on or after 6 April 2024.
  • Serious ill-health lump sums.
  • Defined benefit lump sum death benefits.
  • Pension protection lump sum death benefits.
  • Annuity protection lump sum death benefits.
  • Lump sum death benefits paid after age 75 are not tax-free.

Are there any benefits not tested against the two allowances?

The following benefits are not tested against the allowances.

Small lump sum payments (payments under £10,000) are not tested against either of the allowances.

The following benefits are not tested against the lump sum allowance:

  • a winding up lump sum
  • a trivial commutation lump sum

The following benefits are not tested against the lump sum death benefits allowance:

  • a charity lump sum death benefit
  • a trivial commutation lump sum death benefit

A transfer to a qualifying recognised overseas pension scheme and a disqualifying pension credit are not included as these are not paid tax-free. 

What tax is payable on the non-tax-free benefits?

Benefits that exceed the lump sum allowance or the lump sum death benefit allowances are liable to income tax at the recipient’s marginal rate, as are the ‘income’ parts of any benefits taken, such as an annuity or income taken from a drawdown plan.

What do we mean by marginal rate of income tax? In simple terms this means the amount being paid out is added to the recipient’s income and taxed accordingly. As an example, if the recipient was tax resident in England and had income of £60,000 and received £20,000, the whole £20,000 falls within the higher rate band and would be taxed at 40%.

There is no change to the tax paid if death benefits are paid to a trust and not directly to a beneficiary. Tax at the special lump sum death benefits charge of 45% applies. It’s possible for the beneficiary to claim back overpaid tax when it is paid to them by the Trustees.

Lump sum allowance and lump sum death benefit allowance where lifetime allowance protection applies

Although the lifetime allowance no longer applies from 6 April 2024, the various forms of protection often also protect the amount of tax-free cash that can be paid to an individual. This protected tax-free cash can remain after April 2024.

As with many aspects of the new rules, a lot of the pre-April 2024 regime is still in place. This is the case for the calculation of the amount that can be paid tax-free which still includes the “applicable amount”. This is the cap on the tax-free lump sum which is based on the capital value of the income benefits being paid. This is effectively the same calculation as pre-April 2024, but it has been tweaked to take into account the removal of the lifetime allowance.

Type of protection Lump sum allowance Lump sum and death benefit allowance
Enhanced protection

An individual with an entitlement to tax-free cash of more than £375,000 and more than 25% of the fund on 6 April 2006 could retain their tax-free cash entitlement. Their maximum tax-free cash entitlement would have been shown as a percentage on their enhanced protection certificate.

 

Since 6 April 2023 their tax-free cash is still based on this percentage. However, the percentage is applied to the lower of:

  • their total benefits value on 5 April 2023, or
  • their total benefit value at crystallisation.

An individual with an entitlement to tax-free cash of more than 25% of their benefits value on 6 April 2006 but less than £375,000 couldn't protect the tax-free cash amount using enhanced protection. However, scheme specific tax-free cash protection may apply.

The amount of uncrystallised funds on 5 April 2024
Primary protection

If pre-6 April 2006 tax-free cash was less than £375,000 (25% of the lifetime allowance on 6 April 2006) the amount payable is the lesser of:

  • 25% of the benefit value, and
  • 25% of £1.5 million.

The tax-free cash is protected as a monetary amount if it exceeded 25% of the lifetime allowance on 5 April 2006. Since 6 April 2012 the amount payable is the tax-free cash available on 5 April 2006 increased by 20%.

 

Their maximum tax-free cash entitlement would have been shown as a monetary amount on their primary protection certificate.

£1,800,000 x the individual’s primary protection factor.
Fixed protection 2012 £450,000 £1,800,000
Fixed protection 2014 £375,000 £1,500,000
Fixed protection 2016 £312,500 £1,250,000
Individual protection 2014 25% of protected amount the lower of £1.5 million or the value of benefits on 5 April 2014
Individual protection 2016 25% of protected amount the lower of £1.25 million or the value of benefits on 5 April 2016

How does the lump sum and death benefit allowance work?

As with other changes made by this Bill the rules around the payment of death benefits remain mostly unchanged. For example the two-year rule for paying lump sum benefits remain, as does the tax treatment of benefits pre and post age 75.

What has change is from 6 April 2024 tax free lump sum benefits are tested against the deceased’s lump sum and death benefit allowance, rather than the lifetime allowance.

It is important to note that if 100% of the lifetime allowance has been used before 6 April 2024, the lump sum and death benefit allowance is automatically set to zero.

Benefits in excess of the lump sum and death benefit allowance are taxed at the recipient’s marginal rate of income tax.

The benefits tested against the lump sum and death benefit allowance are shown in What benefits are included in the two allowances? above. However, it should be noted that HMRC has confirmed that for lump sum death benefits paid from funds crystallised by individuals before 6 April 2024, who die under the age of 75 after 6 April 2024, these benefits will not be tested against the lump sum death benefit allowance.

HMRC has confirmed that the process where the personal representatives notify HMRC that a chargeable amount has arisen and HMRC calculate the tax due is now permanent.

HMRC - Lifetime allowance guidance newsletter — December 2023 - 7. Lump sum death benefits

Unfortunately, this means HMRC will not be able to tell the personal representatives what tax is due, until the end of the tax year.

How are benefits taken before 6 April 2024 tested against the new allowances?

In a similar manner to the treatment of pre-6 April 2006 benefits (pension simplification) there is no requirement to prove the amount previously paid tax-free.

To calculate the lump sum allowance already used, a factor of 25% is applied to the percentage of the lifetime allowance (£1,073,100) used.

Remaining lump sum allowance = £268,275 – (25% x previously used % of lifetime allowance on 5 April 2024 x £1,073,100).

To calculate the lump sum and death benefit allowance already used the same calculation applies but the total amount of any serious ill health lump sums are also deducted from the lump sum and death benefit allowance.

Remaining lump sum death benefit allowance = £1,073,100 – [(25% x previously used % of lifetime allowance on 5 April 2024 x £1,073,100) + (the amount of any serious ill health lump sum paid prior to 6 April 2024)]. However, HMRC has confirmed that for lump sum death benefits paid from funds crystallised by individuals before 6 April 2024, who die under the age of 75 after 6 April 2024, these benefits will not be tested against the lump sum death benefit allowance.

However, if the individual can provide evidence that a lower level of tax-free benefits were paid, they can request a transition tax free amount certificate.

What is a transitional tax-free amount certificate?

A transitional tax-free amount certificate is a certificate for an individual, provided on application, and shows the amount of the individual’s lump sum transitional tax-free amount, and the amount of the individual’s lump sum and death benefit transitional tax-free amount.

The application must be made before the first relevant benefit crystallisation event. The application must be made by the individual, and they must apply to the scheme from which the first lump sum is being paid post after 6 April 2024. 

The certificate must contain the following information:

  • the individual’s name, address and national insurance number
  • the individual’s lifetime allowance previously-used amount expressed as a percentage of the standard lifetime allowance at the time the benefit was taken
  • the amount the scheme administrator is satisfied is the individual’s lump sum transitional tax-free amount, and
  • the amount that the scheme administrator is satisfied is the individual’s lump sum and death benefit transitional tax-free amount

Benefits crystallised prior to 6 April 2024 are valued and deducted from the two new allowances. In most cases, where 25% tax free cash was paid out, the valuation will give a reasonably accurate figure.

However, in certain situations the valuation may not be accurate and could result in the remaining lump sum allowance and lump sum and death benefit allowance being reduced more than they need to be. Where that is the case, applying for a transitional tax-free amount certificate will ensure the reduction in the available remaining allowances is for the correct amount.

Some of the circumstances where a transitional tax-free amount certificate will help the individual are:

  • If any benefits were crystallised when the lifetime allowance was below £1,073,100.
  • Transfer to a qualifying recognised overseas pension.
  • If less than 25% tax-free cash was paid because:
    • GMP restricted the tax-free cash.
    • The crystallised benefits included a disqualifying pension credit.
    • It was a defined benefit scheme, and the tax-free cash taken was not 25% of the benefits value.

An example may help explain this.

Sophie took her benefits valued at £750,000 in 2015/16 and used 60% of her lifetime allowance.

The standard calculation would be - 60% x £1,250,000 x 25% = £187,500 paid tax-free.

However, part of her benefits included a disqualifying pension credit of £400,000, none of which could be paid tax-free. This meant the actual tax-free cash paid was:

 £750,000 - £400,000 = £350,000 x 25% = £87,500

To apply for a certificate, an individual has to be a current member of the pension scheme they are asking to produce the certificate. Or the personal representative of a deceased scheme member, can apply to a scheme the deceased was a member of when they died.

The certificate must be produced within 3 months of the request.

The request must be accompanied by complete evidence as to the amount of the individual’s lump sum and death benefit transitional tax-free amount.

Complete evidence, in relation to an individual’s lump sum and death benefit transitional tax-free amount, means evidence of:

  • each lump sum (if any) to which the individual has become entitled, and
  • each lump sum death benefit (if any) that has been paid in respect of the individual, which is comprised, or any part of which is comprised, in the individual’s lump sum and death benefit transitional tax-free amount 

A pension scheme can refuse to produce one, it’s not entirely clear why that would be the case, but the most likely reasons would be:

  • they believe they have not received complete evidence, or
  • there has been a relevant benefit crystallisation event since 5 April 2024

What happens if there has been no benefit crystallisation events between 6 April 2006 and 6 April 2024?

This is most likely to be the case where someone has a protected retirement age, such as football players.

Where only pre-6 April 2006 benefits are in payment, so none have been taken between 6 April 2006 and 5 April 2024 the lump sum allowance and lump sum and death benefit allowance is reduced by 25% of:

For annuities
25 x the current level of income being paid = lump sum allowance/lump sum death benefit allowance used so far.

For drawdown
25 x 80% of the maximum annual amount of capped drawdown pension payable in the drawdown pension year in which the first relevant benefit crystallisation event happens.

Will an individual’s lump sum allowance and lump sum death benefit allowance be reduced if benefits are taken before normal minimum pension age?

Where an individual has a protected pension age of less than age 50 and a relevant benefit crystallisation event occurs before age 50, their lump sum allowance and lump sum death benefit allowance will be reduced to reflect this. The reduction will be by 2.5% for each year before age 55. Previously the lifetime allowance was reduced in the same way.

There is no reduction for relevant benefit crystallisation events that occur after age 55.

What is the overseas transfer allowance and when does the overseas transfer charge apply?

Before the lifetime allowance was abolished, a transfer to a qualifying recognised overseas pension scheme (QROPS) was a benefit crystallisation event (BCE 8).

From 6 April 2024, the amount transferred to a QROPS is tested against the overseas transfer allowance. The overseas transfer allowance is set at the same level as the individual’s lump sum and death benefit allowance.

Benefits in excess of the overseas transfer allowance will be subject to the 25% overseas transfer charge.

The existing exemptions and rules regarding the overseas transfer charge still apply.

HMRC Pensions Tax Manual - PTM102200: Transfers: transfers to a QROPS: essential principles of the overseas transfer charge

When the overseas transfer charge applies due to benefits being over the overseas transfer allowance AND the overseas transfer charge applies, the 25% charge only applies once to the benefits being transferred.

Frequently asked questions

HMRC included some frequently asked questions on the abolition of the lifetime allowance in their Newsletter 155 — January 2024.  We have recreated them below.

No. Available lump sum allowance will only be required for winding-up lump sums and trivial commutation lump sums. This is the effect achieved by the legislation published as part of Finance Bill 2023-24. We understand that the accompanying policy paper is not clear on this point and are looking at amending this.

Yes. Because there is no test of pension savings against the new allowances at age 75, members will be able to be paid an UFPLS after age 75, provided the payment meets all other eligibility criteria.

No. The exclusion from the tapered annual allowance applies only to lump sum death benefits, and not to other taxable lump sums. This is because it is not the choice of the beneficiary to receive a lump sum death benefit.

Any lump sums paid from funds which crystallised before 6 April 2024 have been tested against the LTA, and therefore will be reflected by the transitional arrangements. Lump sum death benefits in this scenario will not be taxed again if paid after the commencement of this legislation.

Under the standard transitional arrangements, the member will not have any allowances left. This is because individuals who have used 100% of their LTA before 6 April 2024 cannot have expected to receive any further tax-free benefits, either as pension income or as lump sums.

If the member can provide complete evidence to demonstrate that they have used less than 100% of their LTA on tax-free amounts, the pension scheme which they apply to (see question 8) can review and determine if that member meets the required criteria for a transitional tax-free certificate. The scheme can then use the evidenced, transitional tax-free amounts to calculate the member’s remaining lump sum allowance and lump sum death benefit allowance.

We expect that the vast majority of individuals will go through the standard transitional calculation and not apply for a transitional tax-free certificate. A transitional tax-free certificate should only be applied for where individuals can provide complete evidence that they have received, as of 6 April 2024, a lower amount as tax-free lump sums than that provided for by the standard transitional calculation. Those who do apply for a transitional tax-free certificate must do so before their first relevant benefit crystallisation event (BCE) and they cannot apply more than once.

The application must be made by the member, and guidance will confirm that we expect applications to be made to the scheme from which the first lump sum is being paid post after 6 April 2024. The member must provide complete evidence to prove their exact tax-free amount received as lump sums, to receive the certificate. The certificate issued should reflect their remaining allowances across all schemes.

The amounts which appears on an individual’s statement should be a monetary figure and not a percentage. The amount of their lump sum allowance and lump sum and death benefit allowance used should be to the nearest pound, rounded down.

As with the LTA, there is no prescribed format for giving this statement to members, so providers can continue to use the P60 where appropriate. Any statements relating to the tax year 2024 to 2025 onwards should show an individual’s lump sum allowance, and lump sum and death benefit allowance used. However, statements issued in 2024 relating to the 2023 to 2024 tax year should still refer to the LTA.

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.