The lump sum allowance (LSA) is £268,275.
You generally won’t be affected by the LSA if the total value of your pensions (excluding the State Pension) is less than £1,073,100. The LSA is 25% of this amount, meaning the tax-free limit is usually £268,275.
The amount of tax-free cash you can take from your pension is normally limited to a quarter of your total pensions. So, if 25% of your pensions adds up to more than the LSA of £268,275, you could receive less than 25% tax free.
The total value of your pensions includes both pensions you have and haven’t taken yet.
If your pensions’ value is over the allowance (or if it might be when you retire), you’ll pay tax on anything you take over the limit. Your pension provider will calculate this based on normal Income Tax rules.
This means the taxable money from your pension lump sum is added to any other taxable income (like a salary or other pension income). The total figure for that tax year is then used to work out how much tax you’ll pay.
There are three types of lump sum that don’t count towards the LSA. This means your allowance won’t reduce if:
✓
You’re taking your whole defined benefit pension in one go and all your pensions are worth less than £30,000 – known as a trivial commutation lump sum.✓
You’re taking a pension that’s worth £10,000 or less in one go – called a small pot lump sum.✓
Your pension scheme is closing and your full lump sum is less than £18,000 – known as a winding up lump sum.
Your allowance might be higher if you have, or apply for, lifetime allowance protection.
