Lump Sum Allowance and Lump Sum Death Benefit Allowance: How will it affect me?
- Reeves Independent
- May 6
- 5 min read
"Change is the only constant in life." – Heraclitus
Change is an inevitable part of our journey, shaping who we are and where we’re headed. Whether it’s personal growth, career shifts, or unexpected twists, embracing change allows us to adapt, evolve, and thrive. The financial landscape is no exception - markets fluctuate, regulations evolve, and new opportunities arise. Staying informed and adaptable is key to navigating these changes successfully, ensuring financial security and long-term stability.
Recent changes to pension regulations have introduced two key allowances that could impact how much of your pension benefits you can take as a lump sum without facing additional tax charges. The Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA) replace the previous lifetime allowance system, altering the way tax-free cash and death benefits are calculated.
Whether you're planning your retirement withdrawals or considering how your pension might support your loved ones in the future, understanding these new allowances is crucial. In this article, we’ll break down what they mean, how they work, and how they might affect your financial planning.
What is the Lump Sum Allowance?
The Lump Sum Allowance (LSA) is a new limit on the total amount of tax-free lump sums an individual can take from their pension during their lifetime. It replaces the previous Lifetime Allowance (LTA) system and is set at £268,275 (which is 25% of the old LTA of £1,073,100).
So, how does it work? Firstly, the LSA caps the total amount of tax-free cash you can withdraw from your pension. If you exceed this allowance, any further lump sum withdrawals will be subject to income tax at your marginal rate. Furthermore, it applies to tax-free elements such as Pension Commencement Lump Sums (PCLS) and certain lump sum payments from defined benefit pensions.
This means that while you can still withdraw from your pension beyond this limit, the tax benefits are restricted once you reach the LSA threshold. Understanding your remaining allowance can help you plan withdrawals efficiently and minimise tax liabilities.
Reeves Independent has created this guide to help you cover all aspects of tax planning, including making the most of your allowances!
How will the Lump Sum Allowance affect me?
The introduction of the LSA will primarily affect individuals who plan to withdraw large tax-free lump sums from their pensions. If you're approaching retirement or already accessing your pension, here’s what you need to consider:
Capped tax-free cash
The LSA limits the amount of tax-free lump sums you can take to £268,275. If you were expecting to withdraw more, the excess will now be taxed at your marginal income tax rate.
Impact on retirement planning
Death benefits considerations
The Lump Sum Death Benefit Allowance (LSDBA) applies when passing on pension benefits. Exceeding this allowance could lead to tax charges for your beneficiaries. (more on this in a bit…)
How Can Reeves Independent Help?
At Reeves Independent, we specialise in pension and retirement planning, helping you make the most of your pension while minimising tax implications. Here’s how we can assist you:
Personalised pension reviews
We assess your current pension pots and help you understand how much of your LSA remains.
Tax-efficient withdrawal strategies
Our experts create tailored strategies to maximise your retirement income while keeping tax liabilities low.
Estate planning support
If you’re concerned about passing on your pension, we help structure your finances to protect your beneficiaries from unnecessary tax charges.
Regular monitoring
With pension rules frequently changing, we ensure your strategy remains up-to-date and effective.
For impartial advice on both of the new allowances, MoneyHelper has put a handy guide together.
What is the Lump Sum Death Benefit Allowance?
The Lump Sum Death Benefit Allowance (LSDBA) is a new limit introduced in April 2024 that restricts the total amount of tax-free lump sum death benefits that can be paid out from a pension. It replaces the previous Lifetime Allowance (LTA) rules for death benefits and is set at £1,073,100, which equals the same level as the old LTA.
So, how does it work? Firstly, if a pension scheme member dies before the age of 75, their beneficiaries can receive pension death benefits tax-free, but only up to the LSDBA limit of £1,073,100. Any lump sum death benefits paid above this limit will be subject to income tax at the beneficiary’s marginal rate. Additionally, The LSDBA applies to lump sum payments but does not affect beneficiaries who choose to take the pension as an income drawdown option instead.
You may well be wondering how it will affect you. Well, individuals with large pension pots who planned to pass them on tax-free will be affected. So will those who want their beneficiaries to receive pension benefits as a lump sum rather than through drawdown. Likewise, families looking to minimise inheritance tax and income tax liabilities on pension wealth will see the effects of this new change in legislation.
How to plan for the LSDBA
If you're concerned about the tax impact on your pension when passing it to loved ones, there are ways to manage this.
Initially, consider drawdown instead of a lump sum – beneficiaries can take inherited pensions as drawdown, which may avoid immediate taxation. You can also use other tax-efficient inheritance strategies – work with a financial planner, such as Reeves Independent, to explore trusts, gifting, and tax-efficient pension structures.
You should also regularly review your pension nominations to ensure your pension is structured correctly, so that your loved ones benefit in the most tax-efficient way.
With the introduction of both the Lump Sum Allowance (LSA) and the Lump Sum Death Benefit Allowance (LSDBA), pension planning has become more complex. The LSA, which replaces the previous tax-free lump sum cap, limits the amount individuals can take tax-free in their lifetime, while the LSDBA restricts the tax-free lump sum death benefits that can be passed to beneficiaries. Exceeding these allowances could result in unexpected tax charges, impacting both your retirement income and your legacy planning.
At Reeves Independent, we specialise in guiding clients through these new rules, ensuring their pensions are structured in the most tax-efficient way possible.
Our expert team can assess your pension allowances and help you to understand how much of your LSA and LSDBA has been used and what steps to take next. Moreover, we will explore strategies to optimise your withdrawals while minimising tax.
Also, we will enable you to create an inheritance plan and advise on the best ways to pass on your pension wealth while avoiding unnecessary tax burdens. With pension regulations that are constantly evolving, Reeves Independent will offer you ongoing support so that you are in control of your pension and retirement planning. We provide regular reviews and tailored strategies to keep your plans on track.
If you’re concerned about how these new pension allowances affect you, contact Reeves Independent today. Our team will help you navigate the changes and ensure your pension works for both your retirement and your legacy.
