The government limits the amount that someone can receive in tax-free lump sums from all their pensions to £268,275. This is known as the Lump Sum Allowance (LSA).
There is also an overarching limit of £1,073,100 on the total tax-free lump sums and death benefits lump sums that can be paid. This is known as the Lump Sum and Death Benefit Allowance (LSDBA).
Lump sums at retirement
You can take the lowest of either 25% of a pension pot or the available LSA as a lump sum.
- if you started paying into your LGPS pension before 1 April 2008, you will receive an automatic lump sum as part of your benefit package that cannot be converted to annual pension.
- all members will have the option to exchange some annual pension to take a lump sum or increase their automatic lump sum.
Find out more about how much lump sum you can take.
From 6 April 2024, if you take a lump sum when your LGPS pension is paid, a Relevant Benefit Crystallisation Event (RBCE) will occur, and we will need to check:
- how much LSA you have already used up.
- how much LSA you have remaining.
To do this, we will request information about lump sum payments you have received from any personal pensions or occupational pension schemes. We will then work out if you have enough LSA remaining to take your LGPS lump sum as a tax-free amount.
What we need to know at retirement
A form will be sent to you with your retirement quotation, and we will need to determine if:
- you took payment of a pension / lump sum before 6 April 2024
- you received a relevant pension lump sum after 6 April 2024
- and if you expect to receive a relevant* pension lump sum on your LGPS retirement date
*Relevant lump sums are those which count towards your LSA after 6 April 2024.
These are:
- Pension Commencement Lump Sums (PCLS) – This a tax-free one-off amount (normally up to 25% of the pension pot) that most people can access when they start receiving a pension.
- Uncrystallised Funds Pension Lump Sums (UFPLS) – These are lump sums you may have drawn down from a money purchase arrangement. Only the tax-free element reduces the LSA.
- Stand Alone Lump Sums (SALS) – This is when all your benefits from a pension scheme are paid as a single lump sum.
Trivial commutation, or small pot payments do not count towards your LSA.
To check how much LSDBA you have used up, we will also need to know if you have received a Serious Ill-Health Lump Sum (SIHLS), a relevant lump sum death benefit, or transferred a pension overseas to a Qualified Recognised Overseas (QRORPS).
If you are retiring soon, we recommend you prepare by gathering this information, including the value and type of any pension lump sums you have been paid after 6 April 2024. If you do not have this, you will need to contact the relevant pension provider.
Working out your LSA at retirement
We work out the value of used LSA differently before and after 6 April 2024.
We would deduct the value of any relevant lump sums taken after 6 April 2024 from the LSA. We would not look at any annual pension you have been paid. We will then check that the amount of lump sum you have requested is less than your remaining LSA.
For example, a member received £25,000 PCLS (Pension Commencement Lump Sum) on 10 April 2024, from a money purchase pension.
We can deduct this from the LSA as:
£268,275 - £25,000 = £243,275 remaining LSA
This member also wants to take the maximum 25% lump sum as part of LGPS pension benefit package which is calculated to be £75,000. The lump sum is £18,750. As this is less than the remaining LSA, the entire lump sum will be tax-free.
We will then work out how much LSA is left which is calculated as: £243,275 - £18,750 = £224,525 remaining LSA.
Transitional rules if you took payment of a pension before 6 April 2024
Before 6 April 2024, the government placed a limit on how much you could build up in pension savings over the course of a lifetime before you had to pay an additional tax-charge. This was known as the Lifetime Allowance. We will deduct 25% of the lifetime allowance you had used before 6 April 2024 from your LSA.
For example, a member had used up 10% of the Lifetime Allowance on 31 January 2024. This works out to £107,310.
25% of £107,310 is £26,827.50.
The remaining LSA is calculated as:
£268,275 - £26,827.50 = £241,447.50 remaining LSA.
Find out more about tax and your pension
Exceeding the Limit
If you use your full LSA, you can still take a lump sum of up to 25% of your total pension pot, but any amount over the Lump Sum Allowance will be paid as Pension Commencement Excess Lump Sum (PCELS) and will be subject to income tax at your marginal rate. More information can be found at the HMRC website: Income Tax rates and Personal Allowances
Transitional protection if you took less than 25% of your Lifetime Allowance as lump sums.
As tax rules changed on 6 April 2024, the government has introduced some protection to assist those who made plans based on the old rules.
Most Local Government Scheme members will not need to access the transitional protection as the standard LSA calculation will not affect their pension options. However, you may wish to consider applying for a Transitional Tax-Free Amount Certificate (TTFAC) if you took a pension before 6 April 2024, and:
- you took less than 25% of the value of the pension pot as a tax-free lump sum.
- the amount of tax-free lump sum you want to take from your LGPS pension could be limited by the LSA.
For example, a member took a money purchase pension on 30 November 2022 with a pension pot value of £750,000. As this was taken before 6 April 2024, we will assume 25% was taken as a tax-free lump sum.
25% of £750,000 = £187,500
The remaining LSA is worked out as:
£268,275 - £187,500 = £80,775
The member wanted a lump sum of £87,000 as part of the LGPS pension package, but as this amount was over the remaining LSA, only £80,775 could be paid tax-free. The remaining £6,225 would be subject to tax at the member’s marginal rate.
However, as only £75,000 of the previous pension was taken as a tax-free lump sum, a TTFAC was applied for to have this amount used in the calculation.
The revised remaining LSA is:
£268,275 - £75,000 = £193,275 remaining.
With the protection, the member would be able to receive all the LGPS lump sum tax-free.
Applying for a TTFAC
You can apply for a TTFAC from any pension scheme you are a member of, however, HMRC have recommended that you apply to either:
- the scheme you crystallised most of your pension with before 6 April 2024, or
- the first scheme from which you take a relevant lump sum after 6 April 2024
If you wish to apply for a TTFAC from us, you must provide us with enough evidence to demonstrate you took less than 25% of your used lifetime allowance as tax-free lump sums.
You should also ensure you allow enough time for us to review your application, for we have up to 3 months to process an application for TTFAC. You must apply for this certificate before your pension benefits are due to be paid, so ideally at the time of receiving a quotation from us.
We will be unable to award the protection if the evidence you provide is not sufficient.
If your application is successful, it must be applied by law. We recommend you get independent financial advice before you apply as it may reduce your remaining allowance.
If you already hold a TTFAC, you must provide this to us when you retire.
Lifetime Allowance protections
The Lifetime Allowance changed several times before it was abolished on 6 April 2024. Each time it changed those who had previously made retirement plans based on the old limits were able to apply for protection. Some types of protection entitle the holder to take a higher amount of tax-free cash. These protections can still be used to increase the Lump Sum Allowance, though the lump sum taken at retirement cannot be more than 25% of the value of the pension pot.
If you hold a valid Lifetime Allowance protection certificate or Lifetime Allowance enhancement factors, you must provide a copy of this to us at retirement.
Relevant Benefit Crystallisation Events (RBCE)
When you take a relevant pension lump sum, or a lump sum death benefit is paid in respect of your LGPS pension from 6 April 2024, we will provide you with written confirmation of how much LSA & LSDBA the payment has used up. You will need to provide this information to other pension schemes should you take a pension lump sum in the future.