Pension Lump Sum Allowances After LTA Abolition: The 2024 Framework Explained

The lifetime allowance (LTA) — the cap on total pension savings that could be taken without a tax surcharge — was abolished from 6 April 2024. For most pension savers, this was welcome news: a complex set of rules, enhanced protections, and the ever-present anxiety of an LTA charge were swept away at a stroke.

However, the abolition of the LTA did not mean unlimited tax-free withdrawals from pension pots. In its place, the government introduced two new lump sum allowances that govern the amount of tax-free cash available from pension savings over a lifetime. These are the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA).

This guide explains how these allowances work, how the pension commencement lump sum (PCLS) is calculated, the treatment of small pot commutations, and what happens — financially and procedurally — when the allowances are exceeded.

The Two New Allowances: An Overview

Lump Sum Allowance (LSA): £268,275

The LSA is the lifetime cap on certain tax-free lump sums paid from pension schemes. The relevant lump sums counted against the LSA are:

• Pension Commencement Lump Sums (PCLS) — the 25% tax-free cash taken when crystallising benefits
• Serious ill-health lump sums (the part that is tax-free)
• Uncrystallised Funds Pension Lump Sums (UFPLS) — but only the tax-free 25% portion

Tax-free cash taken during your lifetime is counted against the LSA. Once the LSA is exhausted, any further lump sums from pension schemes that would ordinarily be tax-free become subject to income tax at your marginal rate.

Lump Sum and Death Benefit Allowance (LSDBA): £1,073,100

The LSDBA is a larger allowance that covers both the tax-free lump sums taken during your lifetime (as counted by the LSA) and certain lump sum death benefits paid from your pension on your death.

The LSDBA is relevant primarily for beneficiaries receiving lump sum death benefits from pensions where the member dies before age 75 — these can be paid free of income tax up to the available LSDBA. If the total of lifetime tax-free lump sums plus death benefits paid exceeds £1,073,100, the excess is taxable as income of the recipient.

Note: where a member dies over age 75, pension payments to beneficiaries (whether as income drawdown or lump sum) are subject to income tax at the recipient's marginal rate regardless of the LSDBA. The LSDBA primarily protects younger-death death benefits.

How the PCLS Is Calculated Under the New Framework

The pension commencement lump sum (PCLS) — the tax-free cash available when you crystallise benefits — is now calculated as the lower of:

1. 25% of the uncrystallised funds being crystallised; and
2. 25% of the remaining Lump Sum Allowance available at the point of crystallisation.

The second limb is the binding constraint for those who have already used some of their LSA. The first limb is the binding constraint for those with large pots who have not yet used any LSA.

Example 1 (full LSA available): A member crystallises a £600,000 DC pension pot with no prior PCLS taken. Their remaining LSA is £268,275.

• 25% of £600,000 = £150,000
• Remaining LSA = £268,275
• PCLS payable: £150,000 (the lesser of the two)

The PCLS is the lower of: 25% of the crystallised fund; or the available LSA. Here 25% of the fund (£150,000) is lower than the remaining LSA (£268,275), so £150,000 is paid tax-free and £118,275 of LSA remains for future crystallisations. The full LSA of £268,275 is only reached once a member crystallises sufficient funds — broadly £1,073,100 or more in total — to use it up.

Example 2: A member has a DC SIPP of £800,000. First crystallisation: £600,000.

• 25% of £600,000 = £150,000
• PCLS taken: £150,000 (within the £268,275 LSA)
• Remaining LSA: £118,275 Second crystallisation: remaining £200,000
• 25% of £200,000 = £50,000
• PCLS taken: £50,000 (within remaining £118,275)
• Total tax-free cash taken: £200,000 (below the LSA cap)

Example 3 (large pot, LSA fully used): A member with a £2,000,000 SIPP crystallises the full pot at once.

• 25% of £2,000,000 = £500,000
• LSA cap: £268,275
• PCLS payable: £268,275 (tax-free); remaining £231,725 that would have been "PCLS" is not tax-free — it is designated to drawdown and taxed when withdrawn.

The LSA effectively caps the tax-free cash at £268,275 for most pension savers, reflecting what was 25% of the old standard LTA of £1,073,100.

Protected Tax-Free Cash

Some members hold enhanced or primary protection from the LTA regime that included a protected PCLS entitlement above the standard limit. These protections were preserved under the post-April 2024 rules. If you hold a protection certificate — whether fixed protection 2012, 2014, or 2016; individual protection 2014 or 2016; enhanced protection; or primary protection — the transitional arrangements may give you a higher LSA than the standard £268,275.

The transitional calculations are complex. HMRC provided guidance on how existing protections translate into LSA adjustments. If you hold any LTA protection, confirm your protected LSA with your scheme administrator or an FCA-authorised adviser before crystallising benefits.

PCLS from Defined Benefit Schemes

The calculation of PCLS from defined benefit schemes differs from DC. In a DB scheme, PCLS is typically calculated by commutation: surrendering annual pension income in exchange for a lump sum, using a commutation factor provided by the scheme actuary. The PCLS is subject to the LSA cap in the same way as DC PCLS.

For members of schemes with enhanced commutation rates (where the factor is more generous than standard), the ability to take a larger PCLS may be a significant benefit — but it is still capped by the LSA.

Members of public sector schemes (NHS, teachers, civil service, local government) accrue pension benefits and separate lump sum entitlements under scheme-specific rules. The lump sum element counts against the LSA, and the interaction with transitional protections should be carefully reviewed for longer-serving scheme members.

Small Pots: The Exception That Does Not Count Against the LSA

Commutation of "small pension pots" under the trivial commutation and small pots rules does not count against the Lump Sum Allowance. This is an important exception:

• Trivial commutation: where total pension wealth (across all schemes) is £30,000 or less, all benefits can be commuted as a single lump sum. The first 25% is tax-free; the rest is taxed as income. These payments do not count against the LSA.
• Small pots commutation: where individual pension pots are £10,000 or less, up to three personal pension pots and an unlimited number of occupational pension pots can be commuted as small pots, regardless of total wealth. Again, 25% tax-free, 75% taxable, and the payment does not count against the LSA.

For individuals with large primary pensions and a few small legacy pots, small pots commutation can provide additional tax-free cash over and above the LSA limit, provided the individual pots are genuinely below £10,000. There is no mechanism to artificially reduce a pot to below £10,000 to exploit this exception — transfers into a pot are monitored.

Exceeding the Allowances: The Tax Consequence

If the LSA is exceeded during your lifetime — through a combination of PCLS payments and other qualifying lump sums — the excess over the allowance is subject to income tax at your marginal rate. This is not an additional penalty tax (as the old LTA charge was for lump sums, at 55%); it is simply standard income tax. For an additional-rate taxpayer, this means 45% tax on the excess.

If the LSDBA is exceeded by a combination of lifetime tax-free lump sums and death benefits paid on your death, the excess death benefit is taxable as income of the recipient at their marginal rate.

The practical implication: for most pension savers with total pension wealth under approximately £1,073,100 (the level at which the full £268,275 PCLS could be taken from a £1m+ fund), the LSA is not a binding constraint. For those with larger pots — particularly those with multiple schemes, DB entitlements, and large SIPP balances — the LSA and LSDBA require monitoring and may influence decisions about when and how to crystallise benefits.

How Global Investments Can Help

The post-LTA landscape of lump sum allowances is considerably simpler than what preceded it — but it is not without complexity, particularly for those with protected allowances, DB benefits, and large pension pots accumulated over long careers.

Global Investments provides specialist pension tax planning covering:

• LSA and LSDBA calculations across all schemes, including DB and DC components
• Transitional protection assessment for clients with LTA protections established before April 2024
• Crystallisation strategy: timing and sequencing of benefit access to optimise tax-free cash
• Death benefit planning in light of the LSDBA and the forthcoming IHT changes from April 2027
• Cross-border analysis for internationally resident clients taking UK pension lump sums

If you have a large pension pot, multiple schemes, or existing LTA protections, we can help you navigate the post-LTA rules and make the most of the available tax-free cash allowances.

This guide is for educational purposes only and does not constitute regulated financial or tax advice. Lump sum allowances, transitional protections, and tax rates are subject to change. Always consult an FCA-authorised adviser before crystallising pension benefits.