What Is the Lump Sum Allowance?
The Lump Sum Allowance (LSA) is a £268,275 lifetime cap on the total amount of tax-free cash you can take from all your pension schemes. It was introduced on 6 April 2024 as part of the replacement framework for the abolished pension lifetime allowance.
The figure of £268,275 is not random – it is exactly 25% of the old lifetime allowance of £1,073,100. The government wanted to ensure that anyone who previously had a pension pot at or below the LTA could still take the same amount of tax-free cash under the new rules.
The LSA applies across all your pension schemes combined. Every time you take tax-free cash from any pension, it reduces your remaining LSA. Once it is used up, no further tax-free cash can be taken from any pension.
What Counts Towards the LSA?
The following tax-free lump sums reduce your Lump Sum Allowance:
- Pension commencement lump sum (PCLS) – the standard 25% tax-free cash you take when you start drawing your pension
- Uncrystallised funds pension lump sum (UFPLS) – the 25% tax-free element of a lump sum taken directly from an uncrystallised pot
- Small pot lump sums – the tax-free portion (25%) of pots worth £10,000 or less
- Trivial commutation lump sums – the tax-free portion when commuting small total pension benefits
- Winding-up lump sums – the tax-free portion paid when a scheme winds up
How It Works: Practical Examples
Example 1: Single pension pot
Sarah has a SIPP worth £500,000. She takes 25% as tax-free cash: £125,000. Her remaining LSA is £268,275 − £125,000 = £143,275. The remaining £375,000 goes into drawdown and is taxed as income when withdrawn.
Example 2: Multiple pension pots
James has three pensions: a SIPP (£600,000), a workplace pension (£400,000), and an old employer's scheme (£200,000). Total: £1,200,000.
- Takes £150,000 tax-free from SIPP (25% of £600,000). Remaining LSA: £118,275
- Takes £100,000 tax-free from workplace pension (25% of £400,000). Remaining LSA: £18,275
- Takes £18,275 tax-free from old scheme. Remaining LSA: £0
- The remaining £31,725 he could take from the old scheme (25% would be £50,000) cannot be tax-free as his LSA is exhausted. If taken as a lump sum, it would be fully taxable.
Example 3: Pension pot below the threshold
Lisa has a total pension pot of £800,000 across two schemes. Her maximum 25% tax-free cash would be £200,000, which is well within the £268,275 LSA. She can take the full 25% tax-free from each scheme without restriction.
| Total Pension Savings | 25% Tax-Free Cash | Within LSA? | LSA Remaining |
|---|---|---|---|
| £400,000 | £100,000 | Yes | £168,275 |
| £800,000 | £200,000 | Yes | £68,275 |
| £1,073,100 | £268,275 | Exactly | £0 |
| £1,500,000 | £375,000 | No – capped at £268,275 | £0 |
| £2,000,000 | £500,000 | No – capped at £268,275 | £0 |
The Lump Sum and Death Benefit Allowance (LSDBA)
Alongside the LSA, there is the broader Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100. The LSDBA covers everything the LSA covers, plus:
- Serious ill-health lump sums (tax-free element)
- Defined benefit lump sum death benefits paid before age 75
- Uncrystallised funds lump sum death benefits paid before age 75
- Drawdown pension fund lump sum death benefits paid before age 75
Think of the LSA as a subset of the LSDBA. Tax-free cash you take during your lifetime reduces both your LSA and your LSDBA simultaneously. After your death, any remaining LSDBA (after deducting lifetime tax-free cash taken) determines how much of the death benefit lump sum can be paid tax-free.
Transitional Protections
If you had lifetime allowance protection before April 2024, your LSA may be higher than the standard £268,275. The enhanced LSA is generally 25% of your protected lifetime allowance amount:
- Fixed Protection 2016 (LTA £1,250,000): LSA of £312,500
- Individual Protection 2016 (LTA up to £1,250,000): LSA of up to £312,500
- Fixed Protection 2014 (LTA £1,500,000): LSA of £375,000
- Enhanced Protection: LSA of up to £375,000
If you had taken pension benefits before April 2024, the proportion of the old LTA you had used is deducted from your new LSA. Your pension provider should have written to you confirming your remaining allowances.
How Pension Providers Track the LSA
When you request tax-free cash from a pension, your provider must check your remaining LSA before making the payment. They do this by asking you to declare how much LSA you have already used from other pension schemes.
You are legally responsible for providing accurate information. If you understate your previous LSA usage and receive more tax-free cash than you are entitled to, HMRC can charge tax on the excess plus penalties.
Keep a record of every tax-free lump sum you take from any pension scheme, including the date and amount. This makes it much easier when a provider asks you to declare your LSA usage.
Strategies for Managing Your LSA
- Consider whether you need to take all your tax-free cash at once. You can take tax-free cash in stages as you crystallise different pension pots over time.
- If your total pensions exceed £1,073,100, prioritise which pots you take tax-free cash from. You may want to take tax-free cash from your largest pots first.
- Balance lifetime and death benefit planning. Taking less tax-free cash now preserves more LSDBA for your beneficiaries.
- Check for transitional protections. If you have enhanced protections, your LSA may be significantly higher.
- Use drawdown income instead. If you have used your LSA, you can still take pension income through drawdown – it is just taxable at your marginal rate.