The highlights
The Lifetime Allowance has been abolished from 6 April 2024 and will be replaced by three new allowances:
- The Lump Sum Allowance (LSA) of £268,275 which your tax-free lump sum at retirement will be tested against.
- The Lump Sum and Death Benefits Allowance (LSDBA) of £1,073,100 which most tax-free lump sums will be tested against such as those payable on retirement, death and on serious ill health.
- The Overseas Transfer Allowance (OTA), which is equal to the member’s LSDBA, which benefits being transferred to a qualifying recognised overseas pension scheme (QROPS) will be tested against.
The detail of the changes
In the Autumn budget in 2023, the government announced the details of their plan to abolish the LTA and replace it with three new allowances, the LSA, the LSDBA and the OTA with effect from 6 April 2024.
The LSA, which is set at £268,275, applies to certain lump sums taken at retirement and is the maximum amount that can be taken tax-free from all pension arrangements. If your lump sums at retirement are more than the LSA, the excess will be taxed at your marginal rate.
The LSDBA, which is set at £1,073,000, limits the total amount of tax-free lump sums paid to or in respect of an individual across all pension arrangements.
The OTA, which is set at the value of the member’s LSDBA, applies to benefits which are transferred to a qualifying recognised overseas pension scheme (QROPS). If your transfer causes you to exceed your OTA, an overseas transfer charge (OTC) will apply to any excess.
Transitional Protections
Members with LTA protection will retain their rights to a protected higher tax-free cash amount from 6 April 2024. For example, a member with Fixed Protection 2012 (FP12) will have a LSA of £450,000 and a LSDBA of £1.8 million (representing the level of FP12 protection) instead of the standard LSA and LSDBA amounts.
Members with valid Enhanced Protection (EP) will retain their entitlement to protected tax-free cash based on the percentage stated in their EP certificate, except this will be applied to the value of their benefits on 5 April 2023 (less any tax-free lump sums paid since that date). For members with EP where there is no protected tax-free cash, their LSA is set at £375,000. Members with EP will have an LSDBA set at the value of their uncrystallised pension rights as at 6 April 2024.
When the LTA was last reduced in April 2016 to £1 million (from £1.25 million), transitional protections in the shape of Fixed Protection 2016 (FP16) and Individual Protection 2016 (IP16) were introduced to help individuals with pension rights already at or around £1 million. Members who do have a valid LTA protection may also benefit from a higher OTA.
While there was no deadline for applications for FP16 and IP16, individuals who now want to rely on either of these protections must apply to HMRC by the new deadline of 5 April 2025.
We are updating the Plan Rules so that members who had applied for LTA protections before 15 March 2023 and who were obliged to cease accruing benefits to avoid losing their protection will now be able to recommence benefit accrual. However, members who apply for FP16 after 15 March 2023 will have to cease benefit accrual otherwise, they will lose their protection.
You can read more about the changes on the questions and answers page here.
