POST 2024 TAX-FREE PENSION LUMP SUM AND DEATH BENEFITS REDUCTION CALCULATOR - work out if future tax-free lump sums could be restricted.
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The purpose of this calculator is work out whether you can take a desired tax-free lump sum from your pension funds or schemes without any tax penalty.
Background
As of 6 April 2024, the Lifetime Allowance (LTA) on pension funds was abolished. This set a ceiling on the maximum amount of pension funds that could be accumulated over your lifetime, and exceeding the limit could result in penal tax charges. This should be good news for individuals with large pension pots. However, two new allowances came into effect. The Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA). These allowances aim to restrict the maximum amounts that can be extracted from pension funds by in the form of tax-free lump sums. Any excess over these limits will trigger an income tax charge at your highest marginal rate.
Although there is some intersection between these two allowances, we can examine each one in turn.
Lump Sum Allowance
The Lump Sum Allowance (LSA) has been set at 25% of the previous Lifetime Allowance before it was abolished. This is £268,275, although it could change in the future. Some individuals have acquired several pensions throughout their lifetime, many employment related, and when they decide to take the pension benefits from a policy or scheme, usually up to 25% of the value of the pension fund can be taken as a tax-free lump sum. Each time such a lump sum is taken, it reduces the LSA by the tax-free amount taken, until theoretically it reduces to zero. So what does constitutes a tax-free lump sum for this purpose ?
The following qualify:
- A Pension Commencement Lump Sum (PCLS). More often just called tax-free cash. Usually limited to 25% of the pension fund value. However, some individual have scheme specific tax-free cash protection that results in a lump sum greater than 25%. In such a case, the excess amount above 25% will be ignored for LSA purposes.
- The tax-free proportion of an Uncrystallised Fund Pension Lump Sum (UFPLS)
- Stand-alone lump sums. This is where an individual could take 100% of their pension fund as a lump sum. This generally relates to Executive Pension Plans (EPPs) that were taken out before April 2006. The tax-free element is frozen at what could have been paid on 5 April 2024. As with the PCLS, unless there is specific existing protections in place, any excess over 25% is ignored for LSA purposes.
Small Lump Sum payments (amounts under £10,000) do not count towards the LSA. These are:
- Winding-Up Lump Sums
- Trivial Commutation Lump Sums
However, if some tax-free lump sums were taken on or before 5 April 2024, these will affect the LSA available if you still have pension funds or are a member of an occupational pension scheme. The standard calculation deducts 25% of the pension value at the time, irrespective of whether a tax-free lump sum was paid out or not. However, if it can be evidenced, you can apply for a Transitional Tax-Free Cash Certificate (TTFAC) to verify the exact amount of tax-free cash taken.
This calculator works out the value based on the Lifetime Allowance in force during the year that you took the pension benefits. For instance if you had a pension fund of £200,000 and took the benefits, including a 25% tax-free lump sum of £50,000 in May 2014, the Lifetime Allowance applicable then was £1,250,000. This equates to 16% of the Lifetime Allowance used.
This amount to be deducted from the lifetime allowance is:
0.25 x 0.16 x 10731000 = £42,294
The reduced LSA is now (£268,275 - £42,294) £225,351
However, if no tax-free lump sum was taken, and a TTFAC can be applied for, then the LSA will not be reduced.
Lump Sum and Death Benefits Allowance
The Lump Sum and Death Benefits Allowance is similar to the Lump Sum Allowance, but also takes into account the receipt of death benefits or serious ill-health lump sum benefits. The LSDBA is currently £1,073,100 unless transitional protections or enhancements apply.
Therefore, the LSDBA takes into account the all the lump sums outlined above, but also any death or serious ill-health lump sums. The following are not taken into account:
- Lump Sum Death Benefits from funds crystallised before 6 April 2024
- Trivial Commutation Lump Sums
- Trivial Commutation Death Benefit Lump Sums
- Winding up Lump Sums – if deemed trivial (£18,000 or less)
- Small Pot Lump Sums worth £10,000 or less
- Charity Lump Sum Death Benefits
- Death Benefits paid out after the member reached the age of 75
In the above calculation for the LSA, this would have the same effect on the LSDBA. A similar calculation would show the LSDBA reduced to (£1,073,100 - £42,294) £1,030,806.
In the vast majority of cases, the LSDBA will only be reduced significantly if substantial death benefits are paid out. However, if the LSDBA reduces to £0, then the LSA also reduces to £0, which means any future lump-sums will not be paid tax-free.
This calculator does not currently factor in transitional protections, such as various primary or enhanced protections for individuals who previously had large pension pots or scheme entitlements, or pension credits in respect of pension sharing upon divorce. In such a scenario, professional Independent Financial Advice should be sought.
Important Points
Use of this calculator does not constitute a recommendation to use pension fund withdrawal. If you are considering going down this route, we recommend that you seek Independent Financial Advice in the first instance, as there may be more suitable options in your particular circumstances.
The figures given by this calculator are only for guidance purposes - whilst we aim to ensure the accuracy of our calculators, we can take no responsibility for the usage made of the calculations generated on this site.
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