Guest Comment: Pensions tax – all change from 6 April 2024

When the lifetime allowance (LTA) finally departs the pensions tax station on 6 April 2024, a key issue will be where to signal the dividing line between tax-free lump sums and taxed lump sums in its absence.

Two new personal tax allowances will make their debut: the “lump sum allowance” (“LSA”) and the “lump sum and death benefit allowance” (“LSDBA”).

With lots of new jargon to digest, we take a brief look at the main announcements and what they mean for schemes.

Two new allowances


In many ways, the LSA and LSDBA will be familiar fare. The standard LSDBA will be £1,073,100, matching the current standard LTA. In keeping with the current standard amount of maximum tax-free cash, the standard LSA will be £268,275, being 25 per cent of the LSDBA.

Individuals with an LTA protection should be able to keep their rights to greater tax-free cash. But an important difference between the two new allowances and the LTA is that they only apply to benefits taken as lump sums.

Pension commencement lump sums and tax-free elements of certain other lump sums will count towards the LSA. Those lump sums, together with certain death benefits and other lump sums which are payable tax-free, will then fall with the LSDBA’s scope.

A new authorised lump sum

The draft Finance Bill 2023-24’s original wording suggested that DB members could potentially cash out much of their benefits, subject to scheme rules and a marginal rate tax charge above the LSA.

Following consultation, the government changed direction, and the amount of benefits that can be taken as cash from a defined benefit (DB) arrangement will instead continue to be limited. But the types of lump sums available will look a little different after April 2024.

With the LTA excess lump sum on its way out, a new authorised lump sum will be introduced: the “pension commencement excess lump sum” (PCELS).

This will be available in connection with a pension coming into payment but only, according to the legislation’s current drafting, where an individual has used up their LSA and has benefits above their available LSDBA.

But, because the new PCELS hinges on tax-free lump sum limits being exceeded, it is not a direct replacement for the LTA excess lump sum which could cause unintended consequences in practice. A recent HMRC newsletter therefore suggests that changes may be afoot here.

Transitioning to the new allowances

Under the new regime, individuals who took benefits before 6 April 2024 will be assumed to have taken maximum tax-free cash, reducing the future availability of the new allowances accordingly. But if an individual took less than the maximum amount, they may be able to request an alternative calculation from their scheme.

In contrast, an individual who exhausted their LTA before April 2024 will not benefit from either of the new allowances.

Ensuring a smooth changeover

The timetable for the latest pensions tax changes is extremely tight, so trustees and their administrators will need to get to grips with a number of key issues to stay on track. These include:

• updating scheme administration systems and relevant processes (eg retirement paperwork) to cater for the two new allowances and how to deal with “relevant benefit crystallisation events” that paying certain lump sums will trigger

• assessing possible areas where the new regime could cut across existing scheme benefit design, eg if benefits are limited by the LTA. Trustees should be ready to act in the event formal rule amendments are needed quickly

• reviewing current member communications and relevant forms, as members will be keen to know how the new changes might affect them, especially those looking to retire around 6 April 2024.

As the Finance Bill is still making its way through parliament, and further HMRC guidance is expected, there is still a lot to do before the latest pensions tax changes reach their ultimate destination on 6 April.



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