Policy paper

Abolition of the Lifetime Allowance (LTA)

Published 22 November 2023

Who is likely to be affected

Individuals who receive lump sum payments or death benefits from registered pension schemes or relieved non-UK pension schemes, and those who have or intend to apply for Lifetime Allowance (LTA) protections, lump sum protections, or LTA enhancement factors.

Individual members of relieved non-UK pension schemes and registered pension schemes who transfer their funds to a Qualifying Recognised Overseas Pension Scheme (QROPS).

Scheme administrators of registered pension schemes and relieved non-UK pension schemes who will need to modify their processes to accommodate changes to the taxation of lump sums, lump sum death benefits, changes to Benefit Crystallisation Events (BCEs), and to the taxation of overseas transfers.

General description of the measure

At Spring Budget 2023, the government announced that it would abolish the LTA. Finance (No.2) Act began this work by removing the LTA charge and delivering some changes to support the removal of the charge.

This measure completes the work to abolish the LTA. It delivers the changes required to abolish the LTA entirely and clarifies the tax treatment of pension savings. It clarifies:

• how lump sums and lump sum death benefits will be taxed in its absence
• the position of individuals with LTA protections
• lump sum protections or LTA enhancement factors
• the function of BCEs
• the tax treatment of transfers to QROPS and sets out all necessary transitional arrangements and reporting requirements

Policy objective

This measure supports the government’s efforts to encourage inactive individuals to return to work, in particular those aged 50 and above, by delivering on the commitment to abolish the LTA. It therefore removes incentives to reduce hours or leave the labour market due to pension tax limits.

Background to the measure

The LTA was introduced in 2006 as a mechanism for limiting tax-favoured pension savings in registered pension schemes. It is the maximum amount of tax-relievable pension savings an individual can benefit from over the course of their lifetime. Individuals could contribute to their pension over this limit, but they were subject to a tax charge on any amounts above the allowance. The original limit was £1.5 million. The LTA was later raised to £1.8 million and then reduced incrementally to its most recent level of £1,073,100.

Since the onset of the pandemic there has been an increase in economic inactivity in the UK — an increase that is larger than for other advanced economies. The government believes that a strong labour market is critical to economic growth in the UK. Within this, encouraging labour market participation, and in turn growing the UK labour market, is a key mechanism to support the economy to produce more and increase gross domestic product (GDP).

In Finance (No. 2) Act 2023 legislation was introduced to prevent individuals from becoming liable to a new LTA charge from 6th April 2023 onwards. This was intended to incentivise those currently considering retirement to remain in employment and to encourage those who have already left the workforce to return. Further changes are required to support the removal of the LTA charge, to deliver on the removal of the lifetime limit for total tax-relievable pension savings, and to ensure that pension tax continues to function effectively in the absence of the LTA charge and limit.

Detailed proposal

Operative date

The legislative changes made in this measure will have effect from 6 April 2024.

Current law

The removal of the LTA charge and much of the wider framework for the LTA impacts multiple different areas of pension tax. All references are to Finance Act 2004 unless specified otherwise.

Lump sums and lump sum death benefits

Section 166 sets the rules for lump sums. Part 1 of Schedule 29 requires the individual to have available LTA for the benefit to be paid. This condition applies to:

• Pension Commencement Lump sums (PCLS)
• Serious Ill Health Lump Sums (SIHLS)
• Uncrystallised Funds Pension Lump Sums (UFPLS)
• Trivial Commutation Lump Sums (TCLS)
• Winding Up Lump Sums (WULS)

Schedule 32 sets out that the payment of PCLS, SIHLS and UFPLS are BCEs.

Section 166 and Schedule 29 set out that an individual whose crystallised funds exceed their available LTA can be paid a Lifetime Allowance Excess Lump Sum (LTAELS).

Schedule 29 sets the maximum PCLS at the lesser of 25% of the capital value of the individual’s pension benefits coming into payment and 25% of their available LTA. It also sets the maximum tax-free amount of an UFPLS at 25% of an individual’s available LTA. For individuals subject to the standard LTA (SLTA) of £1,073,100, this means the maximum for both lump sums is £268,275.

Section 168 sets out the rules for lump sum death benefits and Part 2 of Schedule 29 provides further detail:

• Uncrystallised Funds Lump Sum Death Benefit (UFLSDB)
• Defined Benefit Lump Sum Death Benefit (DBLSDB)
• Pension Protection Lump Sum Death Benefit (PPLSDB)
• Annuity Protection Lump Sum Death Benefit (APLSDB)
• Flexi-access Drawdown Lump Sum Death Benefit (FADLSDB)
• Drawdown Pension Fund Lump Sum Death Benefit (DPFLSDB)
• Trivial Commutation Lump Sum Death Benefit (TCLSDB)

Part 9 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) taxes the TCLSDB as pension income. The tax treatment of the remaining lump sum death benefits depends on the member’s age at death and whether the benefit is paid to qualifying or non-qualifying persons. Chapter 15A ITEPA sets out that:

• when the member dies aged under 75 and the payment is made to qualifying persons it is generally not taxable, unless paid two years or more after the member dies, in which case it becomes taxable at the beneficiaries’ marginal rate
• when the member dies aged 75 or over and the payment is made to qualifying persons it is taxed as pension income
• when the member dies aged under 75 and the payment is made to non-qualifying persons it is generally not taxable, unless it is made two years or more after the member dies, in which case it becomes subject to a 45% tax charge called the special lump sum death benefit charge (SLSDBC) (Chapter 4 ITEPA)
• where the member dies aged 75 or over and the payment is made to non-qualifying persons it is always subject to the SLSDBC (Chapter 4 ITEPA)
• the only exceptions are APLSDBs and PPLSDBs which are never subject to the SLSDBC

Schedule 32 sets out that the payment of an UFLSDB or DBLSDB is a BCE where the member dies under age 75. For all lump sums and lump sum death benefits which are BCEs, any excess over the individual’s available LTA was subject to an LTA charge. Finance (No. 2) Act 2023 provided that no new LTA charge would arise from 6 April 2023 and, where the LTA charge previously applied, made SIHLSs, LTAELSs, DBLSDBs and UFLSDBs taxable at the individual’s or beneficiaries’ marginal rate.

LTA Protections, Lump Sum Protections, and LTA Enhancement Factors

When the LTA was introduced, and each time it has been reduced, protections were offered to individuals who had already built significant pension savings with the expectation of a higher level of LTA. Most protections also give individuals an entitlement to a higher level of tax-free lump sum (PCLS) and higher tax-free amounts of lump sums tested against the LTA. Each protection has its own set of rules and application window:

• Primary Protections (PP) — Schedule 36
• Enhanced Protections (EP) — Schedule 36
• Fixed Protections (FP) — Schedule 18 Finance Act (FA) 11
• Fixed Protection 2014 (FP14) — Schedule 22 FA13
• Individual Protection 2014 (IP14) — Schedule 6 FA14
• Fixed Protection 2016 (FP16) — Schedule 4 FA16
• Individual Protection 2016 (IP16) — Schedule 4 FA16

The rules for EP, FP, FP14, and FP16 included restrictions on benefit accrual (protection cessation events). Finance (No.2) Act 2023 provided that, where an individual had validly applied for these protections before 15 March 2023, these cessation events would from 6 April 2023 no longer apply.

When the LTA was introduced, there were also separate lump sum protections offered to those who had rights before 5 April 2006 to a higher level of tax-free lump sum. These are the protection of lump sum rights exceeding £375,000 for individuals with PP or EP, and scheme-specific lump sum protection (Schedule 36).

Articles 25 to 25D, SI 2006/572 provide that either of these lump sum protections might enable an individual to take the entirety of their pension benefits tax-free as a Stand-Alone Lump Sum (SALS). Finance (No. 2) Act 2023 capped the maximum tax-free amount that can be taken as a SALS at the value that could have been paid on 5 April 2023, with the remainder taxed at the individual’s marginal rate.

For individuals with PP or EP but no separate lump sum protection, Schedule 29 provides that where their entitlement to a PCLS arose after 5 April 2014 and the SLTA is less than £1.5 million, £1.5 million is to be used in place of the SLTA for the purposes of calculating their available portion for a PCLS.

For individuals who became entitled to pension credits prior to 5 April 2006, Schedule 36 provides for an LTA enhancement factor at all BCEs. This enhancement is based on the SLTA for the tax year 2006 to 2007 of £1.5 million.

Sections 220 to 226 provide further circumstances under which individuals may be entitled to an enhanced LTA based on the SLTA at the time of the BCE:

• pension credits from previously crystallised rights
• non-residency
• transfer from a recognised overseas pension scheme

Schedule 36 provides that individuals with a Protected Pension Age (PPA) of less than 50 but who take benefits before Normal Minimum Pension Age (NMPA) have their LTA reduced.

Schedule 36 also sets out how to calculate an individual’s remaining available LTA where they had an actual, but not a prospective, right to an existing pension on 5 April 2006, before the LTA was introduced.

Benefit Crystallisation Events and charges

Sections 214 to 219 set out:

• when a charge to income tax (the LTA charge) arises where a BCE occurs in relation to an individual and the amount of this charge
• when each BCE occurs and the amount that is crystallised by each of those events
• the value and availability of an individual’s LTA that applies at the time of a BCE

International

Paragraphs 13 to 19 Schedule 34 FA 2004 provide that, and how, the provisions relating to the LTA apply in relation to relieved members of relieved non-UK pension schemes. They set out that these provisions apply to such members as if the relieved non-UK pension scheme was a registered pension scheme.

Section 574A Income Tax (Earnings and Pensions) Act (ITEPA) 2003 sets out how relevant lump sums paid from overseas pension schemes to persons resident in the UK are to be treated for the purposes of calculating that individual’s pension income. Step 3 specifies that where a relevant lump sum is paid from an overseas pension scheme that is not a relevant non-UK pension scheme, the amount which would not be liable to income tax if paid from a registered pension scheme should be deducted from the amount of the lump sum. For this step, it is to be assumed that the member has available LTA.  

Paragraph 4(1)(d) Schedule 33 FA 2004 sets out the conditions for being a relevant migrant member of an overseas pension scheme. Paragraph 5 Schedule 33 FA 2004 sets out the meaning of and conditions for being a Qualifying Overseas Pension Scheme (QOPS). This includes the scheme manager undertaking to comply with any prescribed BCEs in relation to relevant migrant members of the scheme (paragraphs 5(1)(c), 5(2), and 5(2A)).

Paragraphs 1-7 Schedule 34 FA 2004 set out the member payment provisions and charges, who is liable to the member payment provisions and to the payment of any member payment charges, and how long the member payment provisions apply for.

Section 244 FA 2004 defines and contains the rules on the Overseas Transfer Charge (OTC). Section 244A defines the OTC as a charge to income tax arising when a recognised transfer is made to a QROPS, or where an onward transfer is made from a QROPS during the relevant period after the original transfer.  Sections 244B to 244G set out the circumstances under which a recognised transfer to a QROPS is excluded from the OTC. Section 244K details the amount of the OTC, which is 25% of the transferred value.

The transfer of funds from a registered pension scheme to a QROPS is a BCE 8 under section 216 FA 2004. It therefore triggers a test of the member’s funds against the LTA. However, subsection (5) of Section 244K FA 2004 sets out that where an LTA charge applies in the case of a transfer to a QROPS, this amount is deducted from the transferred value (before the OTC is calculated).

Reporting

Section 251 FA 2004 and regulation 3(1) The Registered Pension Schemes (Provision of Information) Regulations 2006 (SI 2006/567) set out that the scheme administrator of a registered pension scheme must tell HMRC when certain reportable events occur. This is done by submitting the Event Report for a tax year. Reportable events are split into two categories: reportable changes, and reportable fund movements. Events 2, 6, 7, 8 and 8a are reportable fund movements, in relation to the LTA, that must be reported to HMRC.

Section 254 FA 2004 and The Registered Pension Schemes and Overseas Pension Schemes (Electronic Communication of Returns and Information) Regulations 2006 (SI 2006/570) set out that the scheme administrator is liable for payment of certain tax charges in connection with the scheme. The scheme administrator must account for the income tax they are liable for using the Accounting for Tax (AFT) return. The LTA charge was one of those tax liabilities that the AFT was provided for.

Regulation 14 SI 2006 567 sets out that a benefit crystallisation event (BCE) is when the pension scheme administrator (or in certain circumstances, the pension scheme member’s personal representative) must test the value of the benefits in an individual’s pension scheme that are being crystallised, or deemed to be crystallised, against the individual’s LTA. A BCE statement is issued by the pension scheme to the individual on occasion of a BCE, allowing the individual to work out if they have any LTA available and to correctly complete any tax return.

Proposed revisions

Lump sums and lump sum death benefits

The taxation of pension income will be through the existing income tax structure for pension income. Authorised lump sums and lump sum death benefits will be tested against a new threshold, set at the same level as the present LTA, £1,073,100. Individuals will not pay tax where lump sums do not take them above this level. Any lump sums paid above this level will be taxed at the individual’s or beneficiaries’ marginal rate of income tax.

Although treated as pension income, these benefits will be exempt for the purposes of the tapered Annual Allowance (AA) and the Government Actuaries Department (GAD) rate. This limit is to apply per person and not per scheme. It will be a personal limit against which all lump sums and lump sum death benefits, from all registered pension schemes, will be tested. It will not take into consideration the payment of regular pension income.

The maximum amount payable for a PCLS and the maximum tax-free element for an UFPLS will remain at £268,275, except where protections apply. Any funds taken as a PCLS and UFPLS will also count toward the overall tax-free limit of £1,073,100, or protected amount.

Where an individual has a scheme-specific lump sum protection and they take a PCLS, their lump sum allowance will not be reduced by the total tax-free amount of the PCLS. It will be reduced by 25% of the lump sum and arising pension.

Following consultation, the government can confirm that the tax-free element of a TCLS, WULS and small lump sums will not be deducted from the new thresholds. However, an individual must have available thresholds to be able to take those lump sums.

Where a Stand-Alone Lump Sum (SALS) is paid, but the individual has either PP or EP, the individual’s lump sum allowance and lump sum death benefit allowance will be reduced by the tax-free amount of the SALS.

The requirement to have available LTA to take any lump sum payment will be removed.

The LTAELS will be removed in the absence of the LTA. Following consultation on a revised approach to the PCLS, the government will instead include provision to take a Pension Commencement Excess Lump Sum (PCELS). Payment of a PCELS will be taxed at an individual’s marginal rate.

For the payment of lump sum death benefits from uncrystallised and crystallised funds, in the event a member dies under age 75 and the benefit is paid to:

• qualifying persons, it will be counted towards the deceased member’s lump sum tax free limit, and the excess will be taxed at the beneficiaries’ marginal rate
• non-qualifying persons, it will be counted towards the deceased member’s lump sum tax free limit and the excess will be taxed at basic rate income tax under Part 9 ITEPA — if the payment is made outside of the two-year period and the SLSDBC currently applies, it will continue to be subject to this charge

Protections and lump sum protections

Give eligible individuals until 6 April 2025 to apply for FP 2016 and IP 2016.

Ensure that individuals with valid lump sum protections retain their right to a higher level of tax-free lump sum.

Ensure that individuals with valid LTA protections retain their right to a higher level of tax-free lump sum, and to higher tax-free parts of other lump sums and lump sum death benefits.

For individuals with valid EP, limit the tax-free part of any SIHLS or lump sum death benefit to the total value that could have been paid under that arrangement on 5th April 2024. Marginal rate taxation will be applied on any excess.

For individuals with a PPA below 50, where they take pension benefits before NMPA, provide that their tax-free limit for lump sums and lump sum death benefits be reduced by 2.5% for every year between their first relevant benefit crystallisation event (RBCE) and the date they reach NMPA.

Enhancement factors

Ensure that individuals with an LTA enhancement based on pre-commencement rights to pension credits retain their rights to a higher level of tax-free lump sum, and to higher tax-free parts of SIHLS and lump sum death benefits.

Ensure that individuals with any other LTA enhancement factor retain their rights to higher tax-free parts of SIHLS and lump sum death benefits where they became entitled to this enhancement factor before 6 April 2024.

Give individuals who, prior to 6 April 2024, have become eligible for an LTA enhancement factor until 6 April 2025 to apply.

Benefit Crystallisation Events and charges

Ensure that tax year 2022 to 2023 is the last tax year that the standard LTA is set at £1,073,100. The removal of the LTA means that the standard LTA will not apply as a lifetime limit for all pension savings with effect from 6 April 2024. All BCEs will be removed, and we will introduce RBCEs.

RBCEs are the payment of relevant lump sums and lump sum death benefits.

Following consultation, the government can confirm individuals will still be able to receive the benefits that are currently tested against the LTA under BCEs 5C and 5D.  Their values will continue to be excluded from income tax, maintaining the current treatment.

International

Available LTA will no longer be required for payments of lump sums and lump sum death benefits from a relevant non-UK pension scheme.   

The member payment charges will include marginal rate tax charges on lump sums and lump sum death benefits paid in excess of either the lump sum allowance or the lump sum and death benefit allowance, where those payments are made from funds that have received UK tax relief.

A new ‘overseas transfer allowance’ will be introduced for transfers to QROPS. This allowance will be equal to the level of an individual’s lump sum and death benefit allowance.

Where the total value of an individual’s transfers from registered pension schemes or relieved non-UK schemes to a QROPS exceeds their available allowance, the excess will be chargeable to the OTC.

Reporting

The Event Report will no longer provide for the reporting of events 2, 6, 7, 8 and 8a in connection with the LTA. Instead, the Event Report will provide for the reporting of new event 24, in connection with the payment of RBCEs that are in excess of the new allowances. Event 24 will also notify HMRC about any marginal rate tax paid on the excess, as well as any member holding a valid protection.

Following the removal of the LTA charge from 6 April 2023, completion of the AFT in connection with that charge is no longer required.

When an RBCE occurs the scheme administrator (or insurance company) will give the individual a statement telling them how much of their allowances have been used by the RBCE.

Transitional

To account for benefits taken before 6 April 2024 a transitional calculation is provided so that individuals can calculate their available lump sum allowance and lump sum and death benefit allowance.

Where an individual has previously used 100% of their LTA, they will have exhausted their allowances and the transitional calculation will not apply.

A new method is provided to calculate an individual’s remaining available allowances where they had an actual, but not a prospective, right to an existing pension on 5 April 2006.

Members with complete and accurate records of the previous tax-free amounts they have received will have opportunity to provide these records to their scheme for an alternative transitional calculation.

To facilitate the transition from the LTA regime to the new allowances, the Treasury will have the power, if needed, to make additional necessary primary legislative changes via statutory instrument. This power will only have effect until 5 April 2026.

Summary of impacts

Exchequer impact (£ million)

The costing for this measure was included in Table 4.1 of Spring Budget 2023 as ‘Lifetime Allowance (LTA): remove charge from April 2023 and abolish from April 2024’ and has been certified by the Office for Budget Responsibility. More details can be found in the policy costings documents published alongside Spring Budget 2023.

Economic impact

This measure will have macroeconomic impacts by increasing employment and labour force participation. In their March 2023 Economic and Fiscal Outlook (EFO), the Office for Budget Responsibility (OBR) estimated that changes to the lifetime allowance and the annual allowance on pension contributions will increase employment by around 15,000 in 2027 to 2028, by removing some financial disincentives to continuing in employment for those with large pension pots.

Impact on individuals, households and families

This measure will have a positive impact on individuals saving into a registered pension scheme who are entitled to receive lump sum benefits, or whose beneficiaries are entitled to receive lump sum death benefits. This is because regular pension income will no longer be taken into account for the purposes of the maximum lump sum threshold of £1,073,100, or an individual’s protected level. This increases members’ tax-free lump sum entitlements.

Furthermore, this tax-free threshold will no longer restrict the overall value that can be taken as a relevant lump sum, and lump sum benefits which exceed this monetary cap will be taxed an individual’s or beneficiaries’ marginal rate.

This measure will impact on individuals transferring their pension savings overseas to a QROPS. This is because individuals will be able to transfer the same amount overseas as they currently can, before a tax charge applies, and the rate of charge will be the same.

The measure is not expected to have an impact on family formation, stability, or breakdown.

The measure introduces no new or different responsibilities for individuals. It is overall expected to improve individuals’ experience of dealing with HMRC as the changes simplify the pension tax system and reduce their tax admin obligations.

Equalities impacts

It is not anticipated that there will be any impact on groups sharing protected characteristics beyond males who are close to or at retirement age.

Impact on business including civil society organisations

This measure is expected to impact businesses administering registered pension schemes.

One-off costs could be significant and include familiarisation with the changes to payment conditions and taxation of lump sum and lump sum death benefits, the conditions of LTA protections, the removal of BCEs, transitional arrangements and introduction of relevant benefit crystallisation events (RBCEs). One-off costs will also include updating software in-line with these changes and to accommodate the amended reporting requirements, as well as updating the schemes’ guidance and communications for members.

There is expected to be an ongoing saving for businesses administering registered pension schemes. This is due to abolition of the LTA reducing the number of individuals subject to the LTA charge and the streamlining of systems.

The one-off costs to businesses are estimated at £50 million, but this estimate is subject to an uncertainty of approximately £40 million (for example the cost may vary by up to £40 million above or below this central estimate). The continuing annual savings are estimated at £1 million. These estimates reflect the total impact across all businesses, however costs and savings will be subject to significant variation between individual businesses. Central estimates of compliance costs are shown in the tables below.

Estimated one-off impact on businesses (£ million)

One-off impact	£ million
Costs	50
Savings	—

Estimated continuing impact on administrative burden (£ million)

Continuing average annual impact	£ million
Costs	negligible
Savings	1
Net impact on annual administrative burden	-1

This measure is expected overall to maintain business’ experience of dealing with HMRC.

This measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

To support the delivery of this measure, HMRC will need to update its guidance and the processes for schemes reporting taxable elements of lump sums and lump sum death benefits. These process changes will require HMRC to make changes to its IT systems and digital services. The overall cost of these changes is still being determined but currently estimated to be in the region of £20 million. Additionally, there will be a small cost associated with additional Full Time Equivalent required to support customers in implementing this measure. This cost is estimated to be in the region of £1.5 million across the scorecard period.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with pension scheme administrators.

Further advice

If you have any questions about this change, please contact the Pension Policy team in HMRC by email: policypensions@hmrc.gov.uk.