Understanding the LSA and LSDBA

Introduction

When the Lifetime Allowance (LTA) was abolished in April 2024, two new allowances were introduced – the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA). These allowances limit tax-free lump sums paid from registered pension schemes.

The impact of these changes will depend on your individual circumstances. For example, the total value of your pension savings, whether you’ve already accessed any pension benefits, and whether you hold any type of Lifetime Allowance protection.

In this article, we look at what these new allowances are and when they apply.

What is the Lump Sum Allowance (LSA)?

The Lump Sum Allowance (LSA) limits the total amount of tax-free lump sums you can withdraw from your pension over your lifetime. Any withdrawals exceeding this limit will be taxed at your marginal income tax rate.

Typically, the maximum tax-free lump sum you can take is the lowest of the following:

• 25% of your uncrystallised pension fund
• Your remaining Lump Sum Allowance (LSA)
• Your Lump Sum and Death Benefit Allowance (LSDBA)

The standard LSA is £268,275, but your personal allowance may be higher or lower depending on whether you accessed pension benefits before 6 April 2024, or you have Lifetime Allowance protection. Any tax-free lump sums taken after this date will reduce your available allowance.

The LSA applies to various types of withdrawals, including Pension Commencement Lump Sums (PCLS) and the tax-free portion of any Uncrystallised Funds Pension Lump Sum (UFPLS). These payments are also measured against your remaining LSDBA.

What is the Lump Sum and Death Benefit Allowance (LSDBA)?

The Lump Sum and Death Benefit Allowance (LSDBA) sets a limit on the total amount that can be paid out tax-free as a lump sum in the event of death, serious ill-health, or as part of an overseas transfer to a qualifying scheme. This applies to what are known as relevant lump sum benefits.

The standard LSDBA is £1,073,100, unless you have Lifetime Allowance protection. For example, if you have IP16, your LSA will be 25% of the value of your benefits as at 6 April 2024, up to a maximum of £312,500.

This allowance does not apply to death benefits drawn from funds that were crystallised before 6 April 2024, nor does it apply to death benefits paid if the individual passes away on or after their 75th birthday. In these cases, payments will be taxed at your marginal income tax rate.

If the total lump sum paid to beneficiaries upon death before age 75 exceeds the available LSDBA, the excess will be subject to income tax at the beneficiary’s marginal rate. Remember too that the funds must be nominated by beneficiaries within two years of death to be able to benefit from LSDBA.

We’ll explain more about what happens when you turn 75 later in this article, but it’s worth noting here that LSDBA only applies before age 75. After age 75, there is no LSDBA and all lump sums are taxable.

What happens if you’ve already taken pension benefits?

If you’ve already started taking benefits from a pension before 6 April 2024, your available allowances will be reduced.

If you’ve taken benefits before 6 April 2006

If you began receiving pension benefits before 6 April 2006 (A-Day) and have not withdrawn any further amounts since then, the annual income you receive (or are eligible to receive) will determine the position of the new allowances you are considered to have used.

This calculation will be done for you if you decide to take a tax-free lump sum from 6 April 2024 onwards. If you have taken pension benefits after 6 April 2006 but before April 2024, the remaining calculation will be determined by how much LTA has been used previously.

If you’ve taken benefits since 6 April 2006

If you’ve accessed pension benefits since 6 April 2006, and they were assessed against your Lifetime Allowance, then:

• Your remaining Lump Sum Allowance (LSA) will decrease by 25% of the total Lifetime Allowance you’ve already used
• Your available LSDBA will also be reduced by 25% of your used Lifetime Allowance. However, if you received a serious ill-health lump sum before turning 75, or if lump sum death benefits were paid before 6 April 2024, then 100% of your used Lifetime Allowance will be deducted from your LSDBA
• If your Lifetime Allowance has been fully utilised, your new LSDBA and LSA will be set to £0

If you haven’t taken the maximum tax-free cash

In certain cases, if you have already used up your Lifetime Allowance but didn’t take the full amount of tax-free cash available to you (or if the tax-free amount was less than 25% of the Lifetime Allowance used), you may be eligible to apply for a transitional tax-free amount certificate (TTFAC).

This will be relevant if you took a defined benefits pension or purchased an annuity without withdrawing tax-free cash. The certificate will detail the reduction in your allowances based on the lump sums you have actually received. You’ll need to provide this certificate when accessing benefits from any pension scheme.

You can apply for one of these certificates through any pension scheme you are a member of, but it’s advisable to choose the provider you wish to take the tax-free amount from. Please note that if you are a member of a public sector scheme (such as the NHS Pension Scheme) and affected by the McCloud Remedy, your benefits must be finalised before a certificate can be issued.

There are a few things to be aware of before applying for a TTFAC. For example, the certificate must be made prior to the first RBCE after April 2024 (in other words, before the first time you access any pension benefits after April 2024). You cannot retrospectively apply for one of these certificates.

What happens when you turn age 75?

If you turn 75 on or after 6 April 2024, your pension benefits will no longer be assessed against your LSDBA upon your death. Under the revised rules, a benefits test will only apply when you withdraw a tax-free lump sum (LSA) or transfer your pension to a qualifying overseas scheme.

However, if you turn 75 before 6 April 2024, your benefits will be subject to a Lifetime Allowance assessment on your 75th birthday.

Can you still apply for Lifetime Allowance protection?

If your total pension savings were valued at £1 million or more as of April 5 2016, you may still be eligible to apply for Individual Protection 2016 (IP16).

Originally, there was no set deadline for IP16 applications – it only had to be requested online before taking any form of pension benefits. However, following the removal of the Lifetime Allowance (LTA), the government has now introduced an application deadline of April 5 2025.

Extended IP16 application deadline for those with remediable service

Regulations will be introduced to extend the application deadline to April 5 2027 for NHS Pension Scheme members with remediable service.

This applies if you were a member of the 2015 NHS Pension Scheme before April 2022 and had previously been part of a legacy scheme (such as the 1995 or 2008). This is due to the McCloud Pension Remedy process.

If the remedy increases your total pension value beyond £1 million as of April 5 2016, you will be eligible to apply for IP16.

Consider seeking specialist financial advice

Understanding these new allowances can be complex, and making the right decisions now could have a significant impact on your financial future.

Your Specialist Financial Adviser from Wesleyan Financial Services can help you navigate these changes, supporting you to optimise your tax-free allowance and ensuring you’re making the most of your retirement savings.

Simply book an appointment today. Please note advice charges may apply.

Tax treatment depends on individual circumstances and may be subject to change in the future.