Lump Sum Allowance and Lump Sum and Death Benefit Allowance

From 6 April 2024, the government abolished the framework that set out the limit on the amount you can take from your pension benefits and savings before you’re charged tax, known as the Lifetime Allowance.

In its place, the government introduced two new allowances, which took effect from 6 April 2024, they are the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance.

• The Lump Sum Allowance (LSA) places a limit of £268,275 on the total amount of certain tax-free lump sums that you will be able to receive before marginal rate taxation applies. These are known as Relevant Lump Sums and include the following:
  • A Pension Commencement Lump Sum (PCLS);
  • Tax-free element of an Uncrystallised Funds Pension Lump Sum (UFPLS)
  • Tax-free element of any drawdown payments (including Flexi-Access drawdown).

• The Lump Sum and Death Benefit Allowance (LSDBA) places a limit of £1,073,100 on the total amount of tax-free lump sums that can be paid in respect of an individual before marginal rate taxation applies. This includes any Relevant Lump Sums used up by the LSA, in addition to any Relevant Lump Sum death benefits. Relevant Lump Sum death benefits include the following:
  • Serious Ill Health Lump Sums paid before age 75
  • Tax-free Lump Sum Death Benefits paid in the event of your death, prior to age 75.

Each time you take a relevant lump sum from your benefits and savings, or a relevant lump sum death benefit, you’ll use up some of your Lump Sum Allowance and/or Lump Sum and Death Benefit Allowance.

With effect from 6 April 2023 the LTA tax charge was abolished. However, certain LTA protections may still provide you with a higher amount of tax-free cash under the new LSA and LSDBA allowances. There are a few different things you can do in relation to your benefits to reduce the amount by which they exceed the LSA and LSDBA:

• Apply to HMRC for fixed/individual protection 2016 if you are eligible before 5 April 2025.
• Choose Enhanced Opt Out
• Use a Voluntary Salary Cap

We’ll only be able to confirm how much LSA and LSDBA has been used by the benefits you take that were built up with USS – not with any other scheme. You’ll find an estimate of the LSA and LSDBA you’ve used up at USS in your next Annual Member Statement, and we’ll confirm what LSA and LSDBA you will have used when you retire.

If you’re no longer paying in to USS, contact our Member Service Team on 0333 300 1043 and they’ll send you this information.

If you’ve retired on or after 6 April 2024, you’ll find your LSA and LSDBA on your retirement statement. We’ll provide details of the LSA and LSDBA to you each year too. If you retired prior to 6 April 2024, but you still have some savings invested in the Investment Builder you’ll find details of your LSA and LSDBA used by your USS savings in in your next Statutory Money Purchase Illustration.

If you go over the LSA or LSDBA, you may need to pay tax on any lump sum benefits in excess of your available allowances. This will be paid at your marginal rate and we’ll make sure this is deducted at source from any taxable lump sum benefits we pay to you.

Prior to 6 April 2023, the LTA tax you needed to pay depended on how you took the benefits that were over the LTA limit:

• Benefits taken as pension were taxed at 25%
• Benefits taken as a lump sum were taxed at 55%

From 6 April 2023, there is no LTA tax charge if you exceed the LTA. However, if you choose to take any benefits that exceed the LTA as an excess lump sum, this lump sum will be taxed at your marginal rate. Your Legal Personal Representative will be responsible for reporting this information to HMRC, who will then apply the tax and collect this directly from your beneficiaries.

From 6 April 2024, benefits paid to you, or your beneficiaries, as a tax-free lump sum will count towards your LSA/LSDBA.

However, if you have taken benefits from a registered pension arrangement or transferred benefits overseas to a Qualifying Recognised Overseas Pension Scheme prior to 6 April 2024, the value of all these benefits (i.e. pension income and lump sum benefits) will be assessed against the new allowances. If you are age 75 or over before 6 April 2024, this also includes the value of any benefits not taken by your 75th birthday.

By default, we will assume that 25% of the value of the benefits taken, or transferred overseas, before 6 April 2024 were taken as a tax-free lump sum. If you have taken any benefits as a serious ill health lump sum before the age of 75, we will assume that 100% of the value of any benefits taken were paid tax free.

Alternatively, if you have taken less than 25% of your benefits as a tax-free lump sum, you can apply to any of your pension schemes for a transitional tax-free amount certificate.

If you have taken benefits from a pension scheme prior to 6 April 2024, you can apply to any of your registered pension schemes and ask them to provide you with a Transitional tax-free amount certificate (TTFAC). The TTFAC will detail the amount of LSA and LSDBA that you have remaining at 6 April 2024.

You are eligible to apply for a TTFAC if;

• You have taken pension benefits between 6 April 2006 and 5 April 2024.
• You have had no new pension benefits paid to you on or after 6 April 2024.
• You can provide the scheme you are requesting a TTFAC from with a complete and accurate record of the tax-free amounts you have already taken from all of your registered pension schemes.

You do not have to apply for a TTFAC. However, HMRC recommend if you have taken benefits from a registered pension arrangement prior to 6 April 2024; and taken less than 25% of your benefits as a tax-free cash sum, you should apply for a TTFAC from the first registered pension scheme you plan to take benefits from on or after 6 April 2024. See the HMRC website for more information.

If you wish to apply for a TTFAC from USS, we will require a letter from each of your pension providers confirming:

• The amount of any benefits paid as a tax-free cash sum prior to 6 April 2024. This includes the tax-free element of any Uncrystallised Funds Pension Lump Sums (UFPLS) or drawdown payments.
• The amount of any benefits paid as a Serious Ill Health Lump Sum before age 75.

Complete evidence will need to be provided to USS before a certificate can be issued.