What is the Lump Sum and Death Benefit Allowance for pensions?

Full answer

When the Lifetime Allowance (LTA) was abolished from April 2024, it was replaced by two separate allowances rather than a single cap on total pension savings: the Lump Sum Allowance, set at £268,275, which caps how much tax-free cash you can take from your own pension during your lifetime (typically 25% of each pot, up to this overall limit); and the Lump Sum and Death Benefit Allowance, set at £1,073,100 for 2026/27, which is the broader lifetime cap covering both your own tax-free lump sums and any tax-free lump sum death benefits paid to your beneficiaries after you die. In practice, the Lump Sum and Death Benefit Allowance works as an overall ceiling: any tax-free pension commencement lump sum you take during your lifetime uses up part of this allowance, and if you die holding uncrystallised pension funds, any lump sum death benefit paid to your beneficiaries within that allowance is also paid free of income tax on the beneficiary. If the combined total of lifetime tax-free lump sums and lump sum death benefits exceeds £1,073,100, the excess is taxed as income at the recipient's marginal rate rather than being tax-free -- for lump sums taken during your own lifetime, that excess is added to your income and taxed at your normal income tax rate; for death benefits paid to a beneficiary, the excess is taxed at the beneficiary's own marginal income tax rate. This allowance is separate from, but related to, the £60,000 Annual Allowance, which limits how much can be paid into pensions each year receiving tax relief -- the Lump Sum and Death Benefit Allowance instead limits how much tax-free cash can ultimately be extracted, whether during life or after death, regardless of how the underlying pension pot was built up over the years. People with very large pension pots, particularly those in defined benefit schemes with large transfer values, or anyone who built up substantial uncrystallised funds before the LTA was abolished, are most likely to be affected by this allowance and should seek regulated financial advice before taking large lump sums. Use the pension calculator to check how your pension savings compare against the current allowances.

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