When you access a pension, you’ll usually be able to take up to 25% tax-free – this is known as a tax-free lump sum.
The tax-free amount you take will be checked against two allowances:
- A lump sum allowance of £268,275
- A lump sum and death benefit allowance of £1,073,100
These new allowances replace the now-abolished pension lifetime allowance.
What is the lump sum allowance?
The lump sum allowance (LSA) will be £268,275 for most people.
This allowance is designed to cap the tax-free lump sums you can take from your pensions in your lifetime.
What counts towards the lump sum allowance?
There are two tax-free payments which count towards the allowance:
- Tax-free lump sums (PCLS)
- The tax-free part of a pension lump sum (sometimes called a UFPLS)
Example:
Marnie has a SIPP worth £200,000.
She takes a tax-free lump sum of £50,000 and moves the rest into drawdown.
That leaves Marnie with a remaining lump sum allowance of £218,275, and a lump sum and death benefit allowance of £1,023,100.
If you’ve already accessed a pension, the amount of allowance you have left will be lower.
What happens if I go over the lump sum allowance?
Once you’ve used your lump sum allowance, anything you take from your pension will be subject to income tax at your marginal rate.
What is the lump sum and death benefit allowance?
The lump sum and death benefit allowance (LSDBA) is set at £1,073,100 for most people.
This allowance is a cap on the total tax-free lump sums that can be paid to you in your lifetime and to your beneficiaries when you die.
Like the LSA, it is reduced by tax-free cash payments you take, PLUS any:
- Serious ill health lump sums (paid if you’re terminally ill) paid to you before age 75
- Tax-free lump sums paid to beneficiaries if you die under age 75
What happens to my pension when I die?
What if I transfer my pension overseas?
Keep in mind that an overseas transfer allowance – set at £1,073,100 – will apply if you transfer to a qualifying overseas pension. You’ll pay a 25% charge on anything you transfer above the overseas allowance.
Could my allowances be different to the standard amounts?
If you’ve already accessed a pension, or you applied for protection from the old lifetime allowance, your allowances will be different. Learn more by choosing the section that applies to you.
If you previously applied for protection when the old pensions lifetime allowance changed, your allowances will be higher than the standard amounts. Your certificate or electronic confirmation from HMRC will confirm which type you hold.
If you accessed a pension before 6 April 2024, a standard calculation (see below) will tell you how much of the new lump sum allowances you have left.
The first time you access a pension after 6 April 2024, your current pension provider will ask you to confirm the percentage of the old lifetime allowance you’ve used so they can do this calculation.
Your pension provider would have told you how much lifetime allowance you used – as a percentage – each time you accessed a pension. You can find this on the original statement(s) they sent you at the time, and a total amount on annual pension statements they’ve sent you since.
If you’d already used more than 100% of the lifetime allowance, it’s unlikely you’ll have any lump sum allowance left.
To work out how much lump sum allowance you’ve used, multiply the total percentage of lifetime allowance used by £1,073,100* and then again by 25%.
Example:
Tony accessed a personal pension on 1 March 2024. He took 25% as tax-free cash and put the rest of his pot into drawdown. This used 40% of the lifetime allowance.
Tony’s available lump sum allowance will be reduced by 40% x £1,073,100 x 25% = £107,310.
*(If you hold lifetime allowance protection, substitute your protected allowance for £1,073,100 above).
Your lump sum and death benefit allowance will normally be reduced in the same way by tax-free lump sums you’ve already taken. If you’ve received any serious-ill health lump sums before age 75, your lump sum and death benefit allowance will instead be reduced by 100% of the total percentage of lifetime allowance you’ve used.
The calculation above assumed you took 25% of the value of the pension(s) you accessed tax free, which will be the case for most people.
But you might not have taken 25% of the pension value owing to rules at the time, or because you chose not to. Or you might’ve accessed your pension when the old lifetime allowance was less than £1,073,100. You could apply for a transitional certificate to put you in the correct tax position.
It’s important you seek specialist advice if you’re thinking of applying for a certificate. AJ Bell can’t give you financial advice.
Get your money working for you
Options at retirement
Whether you’re nearing retirement or already there, we’re here to help you enjoy your golden years.
Learn more about retirement
How to make your pension last as long as you do – from getting your retirement pot ready, to when and how you can access it.
Investment pathways in retirement
Make managing your pension pot easier in drawdown.
Important information: Remember that the value of investments can change, and you could lose money as well as make it. We don't offer advice, so it's important you understand the risks. If you're not sure, please speak to a financial adviser. These articles are for information purposes only and are not a personal recommendation or advice. Tax treatment depends on your individual circumstances and rules may change. Pension rules apply.