Understanding the changes to pension allowances

Lump Sum Allowance (LSA)

The Lump Sum Allowance (LSA) limits the tax-free lump sums you can take from pensions. Any amount you take over your allowance will be taxed at your marginal rate of income tax.

The standard LSA is £268,275. Your available allowance may be more or less than this if you have already taken pension benefits before 6 April 2024, or if you hold lifetime allowance protection. It will also be reduced when you take relevant tax-free lump sums from 6 April 2024.

The LSA applies to any Pension Commencement Lump Sum (PCLS) and to the tax-free part of any Uncrystallised Funds Pension Lump Sum (UFPLS) you take. These lump sums are also tested against your available Lump Sum and Death Benefit Allowance (LSDBA).

The amount you’ll be able to take as a tax-free lump sum will usually be the lower of 25% of the benefits being taken, your available LSA, and your LSDBA.

Lump Sum and Death Benefit Allowance (LSDBA)

The Lump Sum and Death Benefit Allowance (LSDBA) limits the tax-free lump sums you can take from pensions, as well as tax-free lump sums that can be paid to beneficiaries after your death. It doesn’t apply to any benefits you moved into drawdown before 6 April 2024. Any amount over your allowance will be taxed at the recipient’s marginal rate of income tax.

The standard LSDBA is £1,073,100. Your available allowance may be more or less than this if you have already taken pension benefits before 6 April 2024, or if you hold lifetime allowance protection. It will also be reduced when relevant lump sums are paid out from 6 April 2024.

The LSDBA applies when you take a Pension Commencement Lump Sum (PCLS) and to the tax-free part of an Uncrystallised Funds Pension Lump Sum (UFPLS). It also applies to serious ill-health lump sums paid before you reach age 75, and lump sum death benefits if you die before reaching age 75.

When benefits are paid out after your death, the LSDBA only applies to tax-free lump sums. If benefits are used to provide a beneficiary with a drawdown pension, they will not be tested against your allowances, and income will usually be tax-free if you die before 75. It had been suggested this would change from 6 April 2024, but this change isn’t included in the current legislation.

Overseas Transfer Allowance (OTA)

The Overseas Transfer Allowance (OTA) limits the amount you can transfer to a qualifying recognised overseas pension scheme (QROPS) without tax charges applying. From 6 April 2024, any transfers you make to a QROPS will be tested against your OTA instead of your lifetime allowance.

The standard OTA will be the same as your LSDBA, but it won’t be reduced by tax-free lump sums you take on or after 6 April 2024. It will only be reduced by the value of the transfers you make to QROPS.

Any amount you transfer to a QROPS that exceeds your OTA will be subject to the Overseas Transfer Charge – a flat rate tax charge of 25%.

Impact if you’ve already taken pension benefits

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

Pension benefits taken before 6 April 2006

If you took benefits before 6 April 2006, but haven’t taken anything since, the annual amount of income you’re taking, or are entitled to take, will be used to calculate how much of the new allowances you’re deemed to have used. The amount will be calculated for you if you take a tax-free lump sum from 6 April 2024.

Pension benefits taken since 6 April 2006

If you’ve taken pension benefits since 6 April 2006 that were tested against your lifetime allowance:

Your available LSA will be reduced by 25% of the total lifetime allowance you’ve used.
Your available LSDBA will also be reduced by 25% of the lifetime allowance you’ve used, unless you received a serious ill-health lump sum before your 75th birthday or any lump sum death benefits have been paid before 6 April 2024. If either of these apply, then 100% of the lifetime allowance you’ve used will be deducted from your LSDBA.

If you’ve already used all your lifetime allowance, your new allowance will be £0.

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

In some circumstances, if you’ve used your lifetime allowance but didn’t take the maximum amount of tax-free cash you were entitled to, or if the maximum tax-free cash was lower than 25% of the lifetime allowance used, then you might be able to increase your available lump sum allowances by applying for a transitional tax-free certificate. This most likely would be if you drew a final salary pension or bought an annuity and didn’t take any tax-free cash. This certificate will show the amount your allowances should be reduced by based on the lump sums you’ve actually received. You’ll need to use this certificate when you take benefits from any pension scheme. HMRC only expect this to apply to a small number of people.

If this applies to you, we recommend you speak to your abrdn financial planning adviser. If you don’t currently have an adviser, find out more about how our financial planning services could help you.

What happens at age 75

If you turn age 75 on or after 6 April 2024, your pension benefits won’t need to be tested against your allowances. Under the new rules, your benefits will only be tested when you take a tax-free lump sum or transfer to an overseas pension scheme.

If you are 75 before 6 April 2024, your benefits will still need to be tested against the lifetime allowance.

Applying for lifetime allowance protection

It is still possible to apply for Fixed Protection 2016 and Individual Protection 2016 if you meet the criteria, before the Government’s application deadline of 5 April 2025.

If you qualify for an enhancement factor to increase your allowances, the deadline for applying for these is also 5 April 2025.

Impact of existing lifetime allowance protection on the new allowances

The table below provides a high-level summary of how existing protections will apply to the LSA and LSDBA from 6 April 2024.

Protection Type	Lump Sum Allowance	Lump Sum and Death Benefit Allowance
Enhanced Protection (without lump sum protection)	Increased to £375,000	Replaced by the value of your uncrystallised rights on 5 April 2024.
Enhanced Protection (with lump sum protection)	Replaced by the amount of PCLS that could have been paid on 5 April 2023.	Replaced by the value of your uncrystallised rights on 5 April 2024.
Primary Protection (without lump sum protection)	Increased to £375,000	£1.8 million increased by your primary protection enhancement factor.
Primary Protection (with lump sum protection)	For the purposes of protected lump sums, the maximum lump sum will be the lower of available LSDBA and the value that could have been paid as a stand-alone lump sum on 5 April 2023.
Fixed Protection 2012	Increased to £450,000	Increased to £1.8 million
Fixed Protection 2014	Increased to £375,000	Increased to £1.5 million
Fixed Protection 2016	Increased to £312,500	Increased to £1.25 million
Individual Protection 2014	Replaced by 25% of your protected lifetime allowance.	Replaced by your protected lifetime allowance.
Individual Protection 2016	Replaced by 25% of the lower of £312,500 or 25% of your protected lifetime allowance.	Replaced by your protected lifetime allowance.
Enhancement Factors (Pension Credits, Non-residence and Overseas Transfers)	Unchanged unless you have an enhancement factor from a pension credit acquired before 6 April 2006 and no primary protection. If this is the case, the LSA will be replaced by the lower of £375,000 or £268,275 uplifted by your enhancement factor.	Unless primary protection applies, your LSDBA will be uplifted by your enhancement factor. The standard LSDBA of £1,073,100 will be used unless you have a higher allowance from lifetime allowance protection (excluding primary protection).
Scheme-specific protected lump sum	We are waiting for updates from the Government and HMRC on how the maximum lump sum payable will be calculated where a member is entitled to a scheme-specific protected lump sum.
Protected Early Retirement Age	If you have a protected pension age and use it to take benefits before you reach age 50, your available allowances will be reduced by 2.5% for every full year between the date you take benefits and the date you would reach Normal Minimum Pension Age (currently 55 but increasing to 57 from 2028).

We’re here to support you

If you’re unsure whether, or how, you’re affected by these changes, we recommend you get in touch with your abrdn financial planning adviser. If you don’t already have an adviser, find out how our financial planning services could help you.