Lump sum and lump sum death benefit allowances from 2024

What new allowances replaced the lifetime allowance?

The lifetime allowance was 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 lump sum 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.

These allowances are reduced if benefits were taken before 5 April 2024.

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 lump sum 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, normally £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 and 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 lump sum 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, 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.

Since 6 April 2024, a relevant benefit crystallisation event relates solely to the tax-free element of lump sum 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 and 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 and 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 and 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. They are tested against the overseas transfer allowance; more details can be found at the end of this article.

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

Benefits that exceed the lump sum allowance or the lump sum and death benefit allowance 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 income tax band and will 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. 

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

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

How does the lump sum and death benefit allowance work?

As with other changes to 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 changed 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 was used before 6 April 2024, the lump sum and death benefit allowance is automatically set to zero. Although a transitional tax-free amount certificate may restore some lump sum allowance and lump sum death benefit allowance.

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 and death benefit allowance.

HMRC has confirmed the process where the personal representatives notify HMRC 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.

Lump sum allowance

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).

Lump sum and death benefit allowance

If no serious ill health lump sum has been paid

To calculate the lump sum and death benefit allowance already used, if no serious ill health lump sum has been paid, the same calculation applies.

Remaining lump sum and death benefit allowance = £1,073,100 – [(25% x previously used % of lifetime allowance on 5 April 2024 x £1,073,100)

When a serious ill health lump sum has been paid

If a serious ill health lump sum has been paid, it’s the full amount of lifetime allowance used that’s deducted from the lump sum and death benefit allowance. That is the 25% factor is not applied.

To calculate the lump sum and death benefit allowance already used, when a serious ill health lump sum has been paid.

Remaining lump sum and death benefit allowance = £1,073,100 – [(previously used % of lifetime allowance on 5 April 2024 x £1,073,100)

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 and death benefit allowance.

If the individual can provide evidence that a lower level of tax-free benefits were paid, they can request a transitional tax-free amount certificate. They must do this before their first relevant benefit crystallisation event. However, if the individual has not had a benefit crystallisation event between 5 April 2006 and 6 April 2024, they cannot apply for a 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. HMRC expects the request to go to the scheme who will pay the first benefits after 6 April 2024.

The certificate will show:

• 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.
• A serious ill-health lump sum was paid.
• 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 normal calculation at the time 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

However, it extremely important to take into account the total amount that has been paid tax free. Although one or more of the above may apply, other tax-free lump sums taken could mean the standard calculation gives them more remaining allowances. This could be the case if a large amount of tax-free cash was taken when the lifetime allowance was £1.8 million.

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, of 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.

It is important to note that where someone has a pre commencement pension but has not had a benefit crystallisation event between 5 April 2006 and 6 April 2024 they cannot apply for a transitional tax-free amount certificate. This was confirmed in HMRC’s Lifetime allowance guidance newsletter: February 2024.

Our article Transitional tax-free amount certificates gives more detail.

What happens if there were no benefit crystallisation events between 5 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 after 5 April 2006 and before 6 April 2024.  And there is a relevant benefit crystallisation event after 5 April 2024 the lump sum allowance and lump sum and death benefit allowance is reduced by 25% of:

For annuities/scheme pensions
25 x the current level of income being paid = lump sum allowance/lump sum and 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 and 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 and death benefit allowance will be reduced to reflect this. The reduction will be by 2.5% for each year before age 55 that a tax-free lump sum is taken. 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.

HMRC’s March lifetime allowance newsletter confirms that, where individuals have crystallised pension benefits prior to 6 April 2024, their available overseas transfer allowance from this date will be reduced by an amount equal to 100% of the value of their LTA used on 6 April 2024.

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.

HMRC Newsletters

HMRC have included frequently asked questions on the abolition of the lifetime allowance in their recent newsletters. Copies of their Lifetime allowance guidance newsletters and their regular pension scheme newsletters can be found in our newsletter archive.

• HMRC Pension Schemes Newsletters