- There are two new allowances to replace the lifetime allowance
- One allowance limits tax-free payments whilst alive
- One allowance limits tax-free payments after death
Key takeaways from this article
The lifetime allowance is being replaced by two new allowances – the Individual's Lump Sum Allowance (ILSA) and the Individual's Lum Sum and Death Benefit Allowance (ILSDBA).
1. Individual's Lump Sum Allowance (ILSA)
This allowance is a limit on how much money can be taken tax-free from your pension whilst alive (ignoring pension income).
The standard allowance is £268,275. The allowance is modified by different forms of protection.
What counts toward this allowance is the tax-free portion of the following lump sums:
- Pension commencement lump sum
- Uncrystallised funds pension lump sum
- Stand-alone lump sums
- Deemed lump sum connected to a Pre A-day pension
Each time one of these lump sums is taken it will use up some of the ILSA until there is no ILSA remaining.
2. Individual's Lump Sum and Death Benefit Allowance (ILSDBA)
This allowance is a limit on how much money can be taken tax-free as a lump sum(s) by beneficiaries upon death of the pension owner.
The standard allowance is £1,073,100. The allowance is modified by different forms of protection.
What counts toward this allowance is the tax-free portion of the following lump sums:
- Pension commencement lump sum
- Uncrystallised funds pension lump sum
- Stand-alone lump sums
- Deemed lump sum connected to a Pre A-day pension
- Serious ill health lump sum
- Pension protection lump sum death benefit
- Annuity protection lump sum death benefit
- Uncrystallised funds lump sum death benefit
- Defined benefit lump sum death benefit
- Drawdown pension fund lump sum death benefit
- Flexi-access drawdown lump sum death benefit
Each time one of these lump sums is taken it will use up some of the ILSDBA until there is no ILSDBA remaining.
3. Tax-free maximums for lump sums
Although there is an overall limit to how much can be taken tax-fee whilst alive and after death, each type of lump sum payment has a maximum amount that can be paid tax free. This is called the permitted maximum. Most of the time the permitted maximum will reference remaining ILSA and ILSDBA but not always (normally where there is a form of protection). So it is important to make sure you are aware of the rules for the permitted maximum for each type of lump sum.
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The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.