What is the Lump Sum Allowance?

The Lump Sum Allowance is one of the three new allowances which have been introduced following the abolition of the Lifetime Allowance on 5 April 2024. 

In simple terms the Lump Sum Allowance will limit the overall amount of tax free lump sums you can take from your pension funds during your lifetime. 

For most people this lifetime limit will be £268,275.

This does not mean you can take all of your pension pot as a tax free lump sum if it is worth less than £268,275 as there are rules in place that limit the tax free amount you can receive to either 25% of the value of the pension pot you are crystallising or £268,275 – whichever is the lower figure. 

When can I take a lump sum from my defined contribution pension? 

You can take benefits from your defined contribution pensions once you have passed your 55th birthday. The minimum age you can take benefits will increase to 57 in April 2028. 

You can only take a tax free lump sum from your defined contribution pensions if they are ‘uncrystallised’. Your pension pot is uncrystallised if you have not taken any benefits from that pension pot on a previous occasion. 

Crystallised funds are created when you have taken a tax free lump sum from your pension (often referred to as a Pension Commencement Lump Sum) and leave the remainder of the fund invested. 

These crystallised pension funds are usually easy to identify on the pension statement you receive from your pension provider each year as they will generally be called ‘Flexi- Access’ or ‘Drawdown’ funds. Typically, because you don’t have to take all of your pension benefits from your defined contributions at the same time you may have a mix of uncrystallised and crystallised pension funds. 

How will my lump sums be taxed?

When you take benefits from an uncrystallised portion of your defined contribution pension funds you can normally take up to 25% of the value of the benefits as a tax free lump sum.

From 6 April 2024, each time you ‘crystallise’ another portion of your pension pot and decide to take some of that payment as a lump sum it will be assessed against your Lump Sum Allowance. Provided you have not used all of your Lump Sum Allowance you will not have to pay income tax on the lump sum you receive. 

How do I know if I have any Lump Sum Allowance left? 

If you have not taken any benefits from your pension funds or are under the normal minimum pension age (currently 55 rising to 57 in 2028), then you will have the full Lump Sum Allowance of £268,275 available.

If you have taken benefits from some of your pension funds as a tax free lump sum already, then you will have used some of your Lump Sum Allowance and will need to work out how much of your Lump Sum Allowance is left. 

If you took benefits from your pension funds between 6 April 2006 and 5 April 2024 you should have received a Benefit Crystallisation Event (BCE) certificate from your pension provider. 

This will tell you how much of the Lifetime Allowance you used up at that time.

HMRC has confirmed that they will assume that 25% of the amount on your BCE certificate was paid as a tax free lump sum and this amount will normally be deducted from your Lump Sum Allowance.

For example, if you took benefits from your pension pot in May 2023 and used up 60% of your Lifetime Allowance (which was £1,073,100 in the 2023/24 tax year) you will be deemed to have used up £160,965 of your Lump Sum Allowance (£1,073,100 x 0.6 x 25%).

I have Lifetime Allowance Protection – can I still receive a higher amount of tax free cash? 

Yes, if you have not crystallised all of your pension benefits and have a valid Lifetime Allowance Protection certificate then you will be able to take a higher amount of tax free cash. 
The amount you will be able to take will vary, depending on the type of protection you hold. 

What happens if the tax free cash I received was less than 25%?  

If you can prove that the actual amount of tax-free cash you received was less than 25% of the value of the pension pot you crystallised, or that none was taken, then you can request a 'transitional tax-free amount certificate' showing the reduced amount to be deducted from your Lump Sum Allowance, rather than the standard 25% of the percentage of Lifetime Allowance used.

It is your responsibility to make the application for a transitional certificate and you must provide complete evidence to prove your exact tax-free amount received as lump sums, to receive the certificate. 
If you are in receipt of a pension from a defined benefits pension scheme, or took benefits from a defined contribution pension scheme between 6 April 2016 and 5 April 2020, when the Lifetime Allowance was less than £1,073,100 you may be eligible to apply.

 For individuals in this second category, the overall amount of tax free lump sum you will have been able to take would have been less than £268,275, as tax free cash could not exceed 25% of the Lifetime Allowance in force at that time. 

So, although the LTA no longer exists, there is still some complexity around accessing benefits from your pension and the potential for tax penalties on lump sum payments if you have a large pension fund. 
If you would like to know more about the Lump Sum Allowance and how it will affect you, it may be worth getting financial advice or getting in touch with your Financial Adviser.  

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.  The information contained within this article is based on our understanding of legislation, whether proposed or in force, at the time of writing. Legislation and taxation may be subject to change. 

Pensions are a long term investment and any income derived from them is not guaranteed, the value of these investments can go down as well as up and you may not get back what you originally invested.

The Financial Conduct Authority (FCA) does not regulate tax advice.