Lump Sum Allowance

The Lump Sum Allowance

The Government has brought in new legislation from 6 April 2024 called the Lump Sum Allowance which places a limit on the amount of the cash lump sum that you can draw from all of your pension arrangements before you become liable to pay income tax.

The Lump Sum Allowance is £268,275.

Lump Sum and Death Benefit Allowance

The Government has also introduced a limit on the total level of tax-free benefits that can be paid in relation to a member of a registered pension scheme, including the payment of tax-free benefits on a member’s death. This limit is called the Lump Sum and Death Benefit Allowance and has been set at £1,073,100. Any cash lump sum that you take will also reduce your available Lump Sum and Death Benefit Allowance.

Further information regarding the Lump Sum Allowance and Death Benefit Allowance can be found at pensionwise.gov.uk.

Annual Allowance

The Annual Allowance is a threshold for how much total pension savings you can build up each tax year (i.e. 6th April to 5th April) across all registered pension schemes, before incurring additional tax charges.

Any excess pension savings above the Annual Allowance are subject to a tax charge, which is collected through the self-assessment process.

The current Annual Allowance is £60,000 for individuals who have not flexibly accessed a money purchase arrangement and/or do not have total taxable income of more than £260,000 (including employer pension contributions).

Tapered Annual Allowance for high income individuals

For members who have a total taxable income of more than £260,000, the Annual Allowance will reduce by £1 for every additional £2 of taxable income above £200,000. The maximum reduction will be £50,000, so anyone with an income of £360,000 or more will have an Annual Allowance of £10,000.

Individual income calculations are required to assess an individual’s exposure to the Annual Allowance and you need to be aware that individuals with taxable income over £200,000 may be affected. The income components include personal sources of income (such as investment income or income from a buy-to-let property), together with employment-related income and a measure of the increase in pension savings over the tax year.

Money Purchase Annual Allowance

If you have flexibly accessed benefits from a money purchase (DC) arrangement, a Money Purchase Annual Allowance (MPAA) of £10,000 applies to the amount of money you can then save to any other DC arrangement, including your DC account.

What should you do?

If you do have other pension schemes which you are considering taking money out of, it is important that you talk to your provider to understand if any of the above affects you.

If you are affected then it is up to you to make sure that you don’t go over your Annual Allowance.

Further information regarding Annual Allowance can be found on pensionwise.gov.uk