Lump Sum Allowance (LSA) for Pensions

The ability to take a sizeable amount of your pension as a lump sum is an attractive option for many people. You may want to pay off your mortgage, make home improvements, help towards a child’s deposit for their first home or pay for a big life event like a wedding or a once-in-a-lifetime holiday.

In this article, our expert team at PIL Southampton answers questions we are commonly asked, looking at all the rules that apply to the lump sum allowance (LSA) – how much you can take and when, and other restrictions and conditions.

What is the lump sum allowance?

The lump sum allowance (LSA) was introduced on 6 April 2024 to replace the lifetime allowance (LTA). 

It is the amount you can take out of your pensions as one substantial withdrawal, rather than as regular income, without paying any tax.

The LSA applies to all your pension arrangements, including final salary/career average (defined benefit) schemes, personal pensions (defined contribution pensions) and any pension that has paid you a lump sum.

It does NOT apply to the State Pension.

You only have the option to take out a lump sum from your pension when you reach a certain age.

The minimum age you can currently withdraw a lump sum from your pension pot without having to pay any tax on the allowed amount is 55. This minimum age requirement is rising to 57 from the 2028/29 tax year. 

How much is my lump sum allowance?

The current lump sum allowance for an individual is 25% of the value of each of your pension pots, capped at £268,275 as a combined total. 

This means that you would reach the maximum amount you could withdraw if your combined pension pot total was over £1,073,100. This was the value of the old Lifetime Allowance before it was abolished.

How much can I take from my pension tax-free?

You can take the maximum LSA of £268,275 before paying tax, from one pension or from a combination of pensions. You can choose to take the amounts at various times, as long as they don’t exceed 25% of each pension pot.

An example would be that if the value of your first pension was £600,000, you could take out 25% of that which would be £150,000.

That would still leave you with a LSA of £118,275 that you could take out of other pensions. This might be the full 25% (£100,000) out of a second pension with a fund value of £400,000, and £18,275 out of a third pension as long as that pension is worth at least £73,100 as anything less than that would make your £18,275 more than 25% of the value of that pension.

If you applied for protection before 6 April 2025, you may be able to take out more than the current limit of lump sum allowance. You can check on the GOV.UK website to see if you have lifetime allowance protection.

Are some lump sums not counted by the LSA?

In some circumstances, you can take out money from your pension without it affecting your lump sum allowance. 

For example, if your combined pension pot is worth less than £30,000 you take a defined benefit pension in one payment. This is called a trivial commutation lump sum.

Or, if you take a ‘small pot lump sum’ in one payment, which means that you are liquidating a pension that’s worth less than £10,000.

Another situation where a LSA should not apply, is when you receive a lump sum if your pension scheme is closing. This is referred to as a winding up lump sum and is applicable when the amount is less than £18,000.

We talk about the other exemption – ‘serious ill-health’ lump sum – further in this article.

What happens if I go over the lump sum allowance?

If you take out more than 25% of each pension as a lump sum, or if you take out lump sums that add up to more than the LSA limit of £268,275, you will usually pay Income Tax on any amount that goes above your tax-free Personal Allowance.

Whenever you go through the process of taking a lump sum out of one of your pensions, you will be asked by your pension provider how much you have already taken from all your pensions. This is so that your pension provider can keep track of how much of your LSA you have used.

How does the lump sum and death benefit (LSDBA) work?

The LSDBA is set at £1,073,100. 

It counts all lump sums taken from your pension/s before and after your death.

Therefore, if you have already taken lump sums out before your death, the limit after your death will be lower.

For example, if your combined pension pot was £1,500,000 when you died, and you were younger than 75 at the time, your beneficiaries would only be able to take the full £1,073,100 LSDBA tax-free if you hadn’t already used any LSA before you died. If you had already taken out, say, £300,000, then your beneficiaries could only take out a further £773,100 tax-free.

Any further amount taken out is likely to be liable for Income Tax.

Your LSDBA might be higher if you applied for protection before 6 April 2025. You can check your lifetime allowance protection status on the GOV.UK website.

Will my beneficiaries pay Inheritance Tax on my pension?

For any of your pensions, it is important that you formally instruct your pension provider who the beneficiaries of your pension will be.

On the event of your death, your pension provider will usually pay death benefits to your stipulated beneficiaries.

The amount they receive will usually be liable to Income Tax if you die after the age of 75 and/or if the death benefit is a regular income that is paid directly from your defined benefit scheme.

Typically, Income Tax is not liable if you die before the age of 75 and if the money is taken out of your pension within two years of the pension scheme being notified of your death.

Were the rules different before April 2024?

Yes, any lump sums taken out of pensions before 6 April 2024 counted towards your lifetime allowance (LTA). This was the amount you could save into a pension before you were liable to pay tax on it, and it was calculated at the time you took the pension money out.

When the LTA scheme ended on 5 April 2024, the limit was £1,073,100.

It is important to note that any tax-free lump sums you had taken out under the LTA, or any amount you had taken out before 6 April 2024, will all count towards your LSA and/or LSDBA.

How PIL Southampton can help you?

Our qualified and highly experienced team of independent financial advisers at PIL Southampton can help you to manage your lump sum allowance options to best suit your personal financial circumstances. Everyone’s situation is unique and we treat you that way.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.