Life After LTA Begins To Take Shape

Life After LTA Begins To Take Shape
abrdn x Finimize

3 months ago7 mins

The publication of a policy paper on the abolition of the lifetime allowance (LTA) and draft rules for 2024/25 onward sets out the tax treatment of pension benefits once the LTA is removed and when lump sums can be paid tax free.

There will be two new allowances advisers will need to become familiar with; the Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LS&DBA) which place a cap on the amount of lump sum benefits which can be taken tax free.

And, while not included in the draft legislation, the policy paper suggests a change to the taxation of pension death benefits, with beneficiaries' drawdown and annuities from pre-75 deaths becoming taxable after April. It is not believed that those with existing tax free inherited benefits will subsequently become taxable but we await written confirmation on this point.

What's changing from April 2024?

The LTA was retained for the current tax year but with the charge for exceeding it set to zero. From next April, the LTA will cease to exist completely.

HMRC have been working with interested parties on the rules for 2024/25 and beyond. The broad framework handed down from government for HMRC to implement is that the LTA is to be completely removed, but a cap is to be maintained to limit what can be taken as a tax free lump sum. Everything else is to be taxed as income.

This has led to the introduction of two new allowances for tax free lump sums.

Lump sum allowance (LSA)

It will still be possible to take 25% of the pension fund tax free as a pension commencement lump sum (PCLS). However, the member must have sufficient lump sum allowance for it to be tax free. The lump sum allowance has been set at £268,275 for those without protection.

In addition to PCLS, the tax free elements of the following lump sums will also count towards the allowance:

  • Uncrystallised pension lump sums (UFPLS)
  • Trivial commutation lump sums
  • Winding-up lump sums

It appears that any tax free element from small pot commutations won't count towards the LSA.

Lump sum and death benefit allowance (LS&DBA)

A second allowance will be used to limit how much can be paid as a tax free lump sum, both during lifetime and on death. This allowance will match the current LTA at £1,073,100. The following lump sums will be tested against the allowance:

  • DB lump sum death benefits
  • Pension and annuity protection lump sum death benefits
  • Uncrystallised funds lump sum death benefits
  • Drawdown pension fund lump sum death benefits (from capped drawdown)
  • Flexi-access drawdown lump sum death benefits
  • Trivial commutation lump sum death benefits
  • Serious ill-health lump sums
  • *Pension commencement lump sums**
  • The tax free elements of + Uncrystallised pension lump sums (UFPLS)** + Trivial commutation lump sums + *Winding-up lump sums

* Also tested against the lump sum allowance.

This is a combined allowance for both lifetime tax free lump sums and tax free death benefits. Consequently, the amount available for lump sum death benefits will be reduced by any tax free cash amounts the member had taken during their lifetime.

For example, John has a SIPP worth £1M and takes £250,000 tax free cash this tax year. If he was to die before age 75, the maximum tax free lump sum death benefit which could be paid would be £823,100 (£1,073,100 less the £250,000). If the balance of John's drawdown pot was greater than this at his death, the excess lump sum will be taxed as income at his beneficiaries' marginal rates.


With the LTA removed, the current regime of benefit crystallisation events (BCEs) will be greatly simplified. Just the BCEs relating to lump sums will remain. Previous LTA usage is no longer relevant.

It's only the monetary amount of previous lump sums, which will be needed to test the amount of the new allowances available. The draft legislation doesn't provide for any revaluation on previously taken lump sums, though there are still transitional rules to be published which could cover this.

However, it's also worth noting that the notion of crystallised and uncrystallised funds no longer has any bearing on what can be paid as a tax free lump sum on death before age 75.

Previously, uncrystallised funds would have been tax free up to the LTA, with crystallised funds not tested so completely tax free. After April it won't matter whether lump sum death benefits paid pre-75 came from crystallised and uncrystallised funds; both will count towards the lump sum and death benefit allowance.


Without any testing against the LTA, the role of various protection regimes becomes solely about increasing the amount of tax free lump sums available by increasing the amount of lump sum allowance and the lump sum and death benefit allowance.

Those with fixed or individual protection will have their LS&DBA set to their protected lifetime allowance with their LSA at 25% of that amount.

Those with primary protection will have their LS&DBA set to £1.8M increased by their primary protection factor. If they have registered PCLS rights, their LSA will be set to their uncrystallised A-Day rights, increased by 20%, less the amounts already taken.

Individuals with enhanced protection will have their LS&DBA set to the value of their uncrystallised as at 5 April 2024, giving those who had valid protection in place at 15 March 2023 and hadn't lost it by 5 April 2023, a further year to increase their LS&DBA.

Individuals with registered PCLS rights under enhanced protection will have their LSA limited to what could have been paid out on 5 April 2023.

Those with enhanced or primary protection and no registered PCLS rights will have their LSA set to £375,000 less lump sums already taken.

Taxation of excess

If a lump sum is paid which is greater than the LSA or LS&DBA the excess is taxable at the recipient's marginal rate of income tax. For lifetime payments such as PCLS or serious ill-health lumps sums, the amount over the allowance is taxed upon the member.

Lump sum death benefits exceeding the LS&DBA will be assessed against the beneficiary(ies). Where there is more than one beneficiary, the available allowance will be apportioned between them to determine how much tax each will have to pay.

If the excess lump sum is payable to a non-qualifying entity, such as a trust, it will be subject to basic rate tax. However, if it's paid out more than two years after death or after age 75, the rate of tax due will increase to 45%.

Pre-75 inherited drawdown to be taxable

The draft legislation issued just covers the new rules for lump sums. However, the accompanying policy paper highlights a significant change to the taxation of pension income. From 2024/25, pension income will always be taxable.

Consequently, inherited drawdown and annuities purchased from uncrystallised funds where the member died pre-75 will become taxable. This is in contrast to lump sums paid from the same funds which will be tax free within the available LS&DBA. This puts things broadly back to the position pre 2015s pension freedoms. So far, only pension death benefits from uncrystallised funds have been mentioned in relation to the income becoming taxable, so we await further details to see if this policy will cover pension death benefits from crystallised funds as well.


While there is no formal consultation on these changes, HMRC will continue to work with interested parties via the LTA working group. While there still may be further changes before any of the draft legislation is enacted, at least we have an insight on the future pensions framework for 2024/25 and beyond.

We will continue to work with HMRC on the roll out of the new rules for 2024/25 and will keep you abreast on the latest updates and what they might mean for advice as things develop.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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