What is the pension Lump Sum Allowance?

Full answer

The Lump Sum Allowance was introduced from 6 April 2024 as part of a wider reform that abolished the old Lifetime Allowance, which previously capped the total amount that could be built up across all of an individual's pensions before extra tax charges applied. Rather than a single overall cap on total pension value, the new system introduced two separate allowances focused specifically on tax-free lump sums: the Lump Sum Allowance, set at £268,275 for 2026/27, which limits the total amount of tax-free cash (usually 25% of each pension pot, up to this overall combined cap across all pensions) an individual can take across their lifetime; and the larger Lump Sum and Death Benefit Allowance, set at £1,073,100, which additionally covers tax-free lump sums paid on death before age 75 and certain serious ill-health lump sums. For the vast majority of pension savers, whose total pension pots across all schemes remain well below roughly £1.07 million (25% of which is £268,275), the Lump Sum Allowance makes no practical difference at all, since they will never take enough tax-free cash in total to bump against the cap. It becomes relevant mainly for people with unusually large combined pension savings, those who previously registered for transitional protections under the old Lifetime Allowance regime (some of whom retain a higher personalised Lump Sum Allowance), or those consolidating several very large pots. Anyone approaching these thresholds should seek specialist pension advice, since the transitional rules from the old Lifetime Allowance to the new allowances are genuinely complex.

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