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Tax controls on pensions - Lump Sum Allowance

The government limits the amount that someone can receive in tax-free lump sums from all of their pensions to £268,275. This is known as the Lump Sum Allowance (LSA).

There is also an overarching limit of £1,073,100 on the total tax-free lump sums and death benefits lump sums that can be paid. This is known as the Lump Sum and Death Benefit Allowance (LSDBA).

This page explains how taking a lump sum as part of your LGPS retirement package interacts with the LSA.

Find out more about the LSDBA.

Lump sums at retirement

You can take the lowest of either 25% of a pension pot or the available LSA as a lump sum.

If you started paying into your LGPS pension before 1 April 2008, you will receive an automatic lump sum as part of your benefit package that cannot be converted to annual pension. However, everyone will have the option to exchange some annual pension to create a lump sum or increase their automatic lump sum.

For more information, see payment options for your pension.

From 6 April 2024, if you take a lump sum when you put your LGPS pension into payment, a Relevant Benefit Crystallisation Event (RBCE) will occur and we will need to check:

  • how much LSA you have already used up
  • how much LSA you have remaining

To do this, we will request information about lump sum payments you’ve received from any private or occupational pension schemes. We will then work out if you have enough LSA remaining to take your LGPS lump sum as a tax-free amount.

What we need to know at retirement

We will need to know if:

  • you took payment of a pension before 6 April 2024
  • you received a relevant pension lump sum after 6 April 2024
  • you expect to receive a relevant pension lump sum on your LGPS retirement date

Relevant lump sums are those which count towards your LSA after 6 April. These are:

  • Pension Commencement Lump Sums (PCLS) – This a tax-free one-off amount (normally up to 25% of the pension pot) that most people can access when they start receiving a pension
  • Uncrystallised Funds Pension Lump Sums (UFPLS) – These are lump sums you may have drawn down from a money purchase arrangement. Only the tax-free element reduces the LSA
  • Stand Alone Lump Sums (SALS) – This is when all of your benefits from a pension scheme are paid as a single lump sum

Trivial commutation, or small pot payments do not count towards your LSA, however, you must have enough LSA remaining to take either of these.

To check how much LSDBA you have used up, we will also need to know if you have received a Serious Ill-Health Lump Sum (SIHLS), a relevant lump sum death benefit, or transferred a pension overseas to a Qualified Recognised Overseas (QRORPS).

If you’re retiring in the near future we recommend you prepare by gathering this information, including the value and type of any pension lump sums you’ve been paid after 6 April 2024.

If you don’t have this, you will need to contact the relevant pension provider. This will ensure you avoid any delays when completing your retirement pack.

Working out your LSA at retirement

We work out the value of used LSA differently before and after 6 April 2024.

We would deduct the value of any relevant lump sums taken after 6 April 2024 from the LSA. We would not look at any annual pension you have been paid. Once we have done that we will check to see if the amount of lump sum you have requested is less than your remaining LSA.

For example, Sarah received a £25,000 PCLS (Pension Commencement Lump Sum) on 10 April 2024, when she drew her money purchase pension.

We can deduct this from the LSA as:

£268,275 - £25,000 = £243,275 remaining LSA

Sarah wants to take the maximum 25% lump sum as part of LGPS pension benefit package which is £75,000. As this is less than her remaining LSA, she can receive the lump sum tax-free.

We will then work out how much LSA Sarah has left as:

£243,275 - £75,000 = £168,275 remaining LSA.

Transitional rules if you took payment of a pension before 6 April 2024

Before 6 April 2024, the government placed a limit on how much you could build up in pension savings over the course of a lifetime before you had to pay an additional tax-charge. This was known as the Lifetime Allowance. We will deduct 25% of the lifetime allowance you had used before 6 April 2024 from your LSA.

For example, John had used up 10% of the Lifetime Allowance on 5 April 2024. This works out to £107,310.

25% of £107,310 is £26,827.50

We can therefore work out his remaining LSA as:

£268,275 - £26,827.50 = £241,447.50 remaining LSA.

Exceeding the Limit

If you use your full LSA, you can still take a lump sum of up to 25% of your total pension pot, capped at £268,275. Any amount over the Lump Sum Allowance will be paid as Pension Commencement Excess Lump Sum (PCELS) and will be subject to income tax at your marginal rate.

If we receive a P45 for the same tax year before we process the payment, we will apply the tax code shown on a Month 1 basis. If the P45 is not available, we will apply an emergency tax code on a Month 1 basis to any PCELS payment.

This could result in you either paying more tax than necessary or not paying enough. If you overpay or underpay income tax, HMRC will contact you at the end of the tax year to notify you of any over or underpayment.

If you want to claim an overpayment sooner, you can do so by completing a P53Z form.

We cannot answer any questions on tax and we won’t be able to confirm how much tax will be deducted before the payment is processed. If you have any questions about tax, you should contact HMRC.

Transitional protection if you took less than 25% of your Lifetime Allowance as lump sums

As tax rules changed on 6 April 2024, the government has introduced some protection to assist those who made plans based on the old rules.

Most people won’t need to access the transitional protection as the standard LSA calculation will not affect their pension options. However, you may wish to consider applying for a Transitional Tax-Free Amount Certificate (TTFAC) if you took a pension before 6 April 2024, and:

  • you took less than 25% of your lifetime allowance (or the value of the pension pot) as a tax-free lump sum
  • the amount of tax-free lump sum you want to take from your LGPS pension could be limited by the LSA

If you are successful in your application, we can use the value of the tax-free lump sum you took before 6 April 2024 to work out your LSA.

For example, Lou took a money purchase pension before 6 April 2024 with a pension pot value of £750,000. As this was taken before 6 April, we assume 25% was taken as a tax-free lump sum.

25% of £750,000 = £187,500

We worked out his remaining LSA as:

£268,275 - £187,500 = £80,775

Lou wanted to lump sum of £87,000 as part of his LGPS pension package. However, as this amount was over his remaining LSA, only £80,775 could be paid tax-free. The remaining £6,225 would be subject to tax.

However, Lou only took £75,000 of his previous pension as a tax-free lump sum. He therefore applied for a TTFAC to have this amount used in the calculation.

We revised his remaining LSA as:

£268,275 - £75,000 = £193,275 remaining.

In this case, Lou would be able to receive all of his LGPS lump sum tax-free.

Applying for a TTFAC

You can apply for a TTFAC from any pension scheme you are a member of, however, HMRC have recommended that you apply to either:

  • the scheme you crystallised the majority of your pension with before 6 April 2024, or
  • the first scheme from which you take a relevant lump sum after 6 April 2024

If you wish to apply for a TTFAC from us, you must provide us with enough evidence to demonstrate you took less than 25% of your used lifetime allowance as tax-free lump sums.

We would usually expect this to be an officially headed letter clearly showing:

  • the total value of the pension pot or the used Lifetime Allowance, and
  • the value and type of any tax-free lump sum.

You should also ensure you allow enough time for us to review your application, we have up to 3 months to process an application for TTFAC and we will be unable to award the protection if the evidence you provide isn’t sufficient. If your application is unsuccessful, you will be unable to apply again.

If you apply for a TTFAC and your application is successful, it must be applied by law. We recommend you get financial advice before you apply as it may reduce your remaining allowing.

If you already hold a TTFAC, you must provide this to us when you retire.

Lifetime Allowance protections

The Lifetime Allowance changed several times before it was abolished on 6 April 2024. Each time it changed those who had previously made retirement plans based on the old limits were able to apply for protection. Some types of protection entitle the holder to take a higher amount of tax-free cash. These protections can still be used to increase the Lump Sum Allowance, though the lump sum taken at retirement cannot be more than 25% of the value of the pension pot.

If you hold a valid Lifetime Allowance protection certificate or you hold Lifetime Allowance enhancement factors, you must provide a copy of this to us at retirement.

Find out more about the various types of protection that can be found.

Relevant Benefit Crystallisation Events (RBCE)

When you take a relevant pension lump sum, or a lump sum death benefit is paid in respect of your LGPS pension, we will provide you with written confirmation of how much LSA & LSDBA the payment has used up. You will need to provide this information to other pension schemes should you take a pension lump sum in the future.

Unless you have opted out of electronic communications, this letter will be uploaded to our self-service portal, ‘my pension online’. If we hold your current email address, we will let you know when it’s ready to view.