As the table in the previous section states, the Lifetime Allowance currently does not impact the NHS Pension, or any other pensions you have as it has been set to £0, with it due to be scrapped completely during 2024.

This means that the total value of all pensions that you have is uncapped and its value will only be limited by the Annual Allowance however, there are now two new Lump Sum Allowances limiting the tax free amounts that can be taken.

One capping the tax free lump sum known as the Lump Sum Allowance (LSA) and the other affecting the tax free amount available for death benefits, the Lump Sum Death Benefit Allowance (LSDBA) .

Lump Sum Allowance (LSA)

The new lump sum allowance (LSA) is currently set at £268,275

This means that the maximum tax free amount you can take from all your pensions is a total of £268,275 (NOT this amount from each one!).

The lump sum allowance test is applied every time you claim a lump sum from any pensions you have and the amount of the tax free cash you can take is subtracted from the balance. Have a look at this example:
Lump Sum Allowance = £268,275
Lump Sum claimed from the 1995 Section at 60 = £60,000
Lump Sum Allowance remaining: £268,275 – £60,000 = £208,275 – No tax

Lump Sum claimed from the 2015 Scheme at 67 = £100,000
Lump Sum Allowance remaining: £208,275 – £10,000 – No tax

If a lump sum is taken and there is no LSA left then the extra amount is subject to Income Tax (See below).

If you have any form of pension protection, this may give you a higher protected amount. The ‘protections’ were:

• Enhanced Protection
• Primary Protection
• Fixed Protection 2012
• Fixed Protection 2014
• Individual Protection 2014
• Fixed Protection 2016
• Individual Protection 2016

If you have any of these and need to know how they can increase the tax free amount of lump sum you can claim, contact the Pension Support Service (PSS) on 0800 327 7260.

Lump sum and death benefit allowance (LSDBA)

The lump sum and death benefit allowance is £1,073,100

This means that the maximum amount of benefits you or your beneficiaries can take from all your pension schemes as a tax-free lump sum.

This may be higher if you hold one of the previously available Pension Protections (noted above)

If you’re under 75 years old when you pass away, the benefits can be paid as a tax-free lump sum (subject to this allowance).

Any excess above this limit is taxed at the beneficiary’s marginal rate (See below)..

The way this allowance works is very complicated and there are many ‘additional’ rules. If you would like to know more please call or e-mail the Pension Support Service.

What tax is payable on the non-tax-free benefits?

Benefits that exceed the lump sum or the death benefit allowance are liable to income tax at your marginal rate.

What do we mean by marginal rate of income tax? In simple terms the amount of the excess being paid out is added to your income and at either 20%, 40%, 45%, depending on the new total of your income.

As an example, if you had an income of £50,000 and received £20,000, the whole £20,000 falls within the higher rate income tax band and will taxed at 40%.