TIMING TAX-FREE CASH: A REFRESH OF LSA AND LSDBA

Each year, we have seen an increase in clients taking their tax-free cash (TFC) ahead of the Autumn Budget. While autumn might feel distant, the changes to IHT on pensions from April 2027 could make summer a valuable opportunity to plan ahead and review your client’s TFC options. To do so, it’s important to have a clear understanding of the Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA).

LSA and LSDBA

From 6 April 2024, the Lifetime Allowance (LTA) was abolished and replaced by two separate allowances: the Lump Sum Allowance (LSA) and the Lump Sum Death Benefit Allowance (LSDBA). These changes simplify the rules in some respects but introduce new complexities that are important to understand.

Lump Sum Allowance (LSA)

Set at £268,275 (or a higher protected amount for those with protection). This allowance covers tax-free lump sums during life, including pension commencement lump sums (PCLS) and the tax-free portion of uncrystallised funds pension lump sums (UFPLS). Trivial commutation and small pot lump sums are excluded from this calculation.

The LSA is reduced by previous Benefit Crystallisation Events (BCEs) and future Relevant Benefit Crystallisation Events (RBCEs). For those who crystallised benefits when the LTA was lower, the default calculation uses 25% of £1,073,100 (the final LTA value) multiplied by the percentage of LTA used as of 5 April 2024.

Example: Mrs Miggins crystallised benefits in 2016 when the LTA was £1 million. She took a PCLS of £250,000. By 5 April 2024, she had used 75% of the LTA. Her available LSA is calculated as:

25% × £1,073,100 × 75% = £201,206

LSA Remaining = £268,275 – £201,206 = £67,069

Lump Sum Death Benefit Allowance (LSDBA)

Set at £1,073,100 (or a higher protected amount for those with protection). This covers death benefit lump sums and serious ill-health payments, excluding charity lump sums and trivial commutation death benefits. Like the LSA, the LSDBA is reduced by previous BCEs and future RBCEs.

Following through the example above Mrs Miggins would have:

LSDBA Remaining = £1,073,100 – £201,206 = £871,894

Transitional Tax-Free Amount Certificates (TTFAC)

Some clients may not have taken TFC previously or may have taken less than they were entitled to. The TTFAC allows eligible clients to apply for additional tax-free amounts based on their position before 6 April 2024. Who could benefit from a TTFAC?

• Clients who took less than 25% PCLS historically
• Clients who crystallised when the LTA was lower than £1,073,100
• Clients who have used all their LTA and have uncrystallised funds remaining.

A TTFAC application must be submitted before the first RBCE, accompanied by complete evidence of all previous lump sums taken. For eligible clients, this can unlock additional tax-free cash that might otherwise be subject to tax—making it worth reviewing historical records.

Example

Mr Miggins crystallised his pension on 01/06/2016 when the LTA was £1,000,000. He crystallised £800,000 and took a PCLS of £200,000.

Under the default LSA calculation the assumed LSA used would be:

80% × £1,073,100 × 75% = £214,620

LSA Remaining = £268,275 – £214,620 = £53,655

LSDBA Remaining = £1,073,100 – £214,620 = £858,480

Under the TTFAC it locks in the monetary amount that was taken as TFC instead:

LSA Remaining = £268,275 – £200,000 = £68,275

LSDBA Remaining = £1,073,100 – £200,000 = £873,100

Protections

The table below sets out the LSA, LSDBA, and PCLS treatment for each protection type:

*Primary Protection+ (PP+) allows the LSA to be higher. For PP+ holders, the LSA is calculated as their original Protected Pension Fund value on A-Day multiplied by 1.2, capped at their actual LSA if lower.

If the client has Primary or Enhanced Protection with PCLS Protection, or scheme-specific protection from A-Day, further rules apply. It is worth raising this with Transact Technical Services for clarification.

Timing TFC

Taking TFC now could allow clients to benefit from current tax allowances and protections, locking in known amounts before any potential autumn budget changes. However, the real planning opportunity extends beyond simply reducing the pension fund size.

IHT planning beyond the pension

By reducing down the values of a client’s pension funds through TFC withdrawal, this can reduce the amount subject to IHT from April 2027 within the pension. However, this is only part of the picture.

What happens to the TFC once taken? If it remains in the client’s bank account, it is still considered part of their estate for IHT purposes. This is where planning around gifting becomes valuable. PCLS that is not needed could be gifted to beneficiaries or into a trust, starting the seven-year gifting clock for IHT exemption.

In our next Adviser Update we will be looking into the options available when it comes to gifting into trusts.

Transact Technical Support

Understanding LSA, LSDBA, and protection calculations can be complex. Transact provides several tools to support you:

TFC Calculators on Transact-Online (TOL) model tax-free cash positions and allow you to demonstrate the impact of taking TFC now versus deferring, these include:

• Converting historical Lifetime Allowance positions into LSA and LSDBA equivalents
• Comparing standard versus transitional tax-free cash certificate eligibility and outcomes.

Additionally, Transact Technical Services remains available to support advisers with Technical queries relating to pensions, taxation, trusts and associated calculations.

Key message

The message to clients is simple but important: pensions are changing in 2027. Summer is a good opportunity to plan ahead of any Autumn Budget announcements. Reviewing your clients’ options now could benefit their whole estates, not just their pensions.

All information is based on our understanding and interpretation of applicable law and regulation which is subject to change. Tax treatment depends on individual client circumstances and may change in the future.