UK Pension LTA Abolition + LSA / LSDBA Detailed Guide 2026/27

Q What replaced the Lifetime Allowance?

The Lifetime Allowance was abolished from 6 April 2024 (Finance Act 2024 s.14 and Schedule 9). Three allowances replaced it. The Lump Sum Allowance (LSA), £268,275 as standard, caps the tax-free lump sums you can take in your lifetime. The Lump Sum and Death Benefit Allowance (LSDBA), £1,073,100 as standard, caps those lifetime lump sums plus certain tax-free lump sums paid on your death. The Overseas Transfer Allowance (OTA), £1,073,100 as standard, caps transfers to an overseas scheme that can escape the overseas transfer charge. The LSA is 25% of £1,073,100, the Lifetime Allowance before abolition. There is no longer a tax charge on the total size of your pensions; only tax-free lump sums are capped. A protected allowance can raise these amounts.

Q How does the Lump Sum Allowance work and how do I track it?

gov.uk lists three lump sums that use up the LSA: a pension commencement lump sum (PCLS, the tax-free cash when benefits start), the 25% tax-free part of an uncrystallised funds pension lump sum (UFPLS), and a standalone lump sum, which only some people with lump sum protection from before April 2006 can take (HMRC PTM161500). Small-pot and trivial commutation lump sums are not on that list. Each use reduces what is left: after a £100,000 PCLS, £168,275 of the standard LSA remains. Example: crystallising a £1,500,000 pot. 25% would be £375,000, but a PCLS is capped at the lower of 25% and your available LSA (HMRC PTM063230), so the PCLS is £268,275. The other £106,725 is not paid tax-free: it stays in the pension and is taxed as income, at your marginal rate, in whichever year you draw it.

Q What does the Lump Sum and Death Benefit Allowance cover?

The LSDBA is used by every lump sum that uses the LSA, plus a serious ill-health lump sum and most lump sum death benefits; charity and trivial commutation lump sum death benefits are excluded (HMRC PTM172000). So each £1 of tax-free cash taken in life also uses £1 of LSDBA. Only lump sums are tested against it, not income. On death, gov.uk says: if you die under 75, a lump sum from a defined contribution pot is tax-free up to the available LSDBA if paid within 2 years of the provider being told of the death, and taxed as the beneficiary's income if paid later; drawdown income or an annuity from a new drawdown fund is tax-free and uses no LSDBA. If you die at 75 or over, lump sums and drawdown income are taxed as the beneficiary's income, with no tax-free part. From 6 April 2027 most unused pension funds and death benefits are also due to count towards your estate for Inheritance Tax, with the spouse, civil partner and charity exemptions kept.

Q Do pre-2024 LTA protections still apply?

Yes. A protected allowance can raise your LSA and LSDBA above the standard £268,275 and £1,073,100 (HMRC PTM176100). The protections are primary and enhanced protection (2006), fixed protection 2012, 2014 and 2016, and individual protection 2014 and 2016. The amount depends on the protection held: for example, with enhanced protection but no lump sum protection the LSA is £375,000 (HMRC PTM176310). Your certificate or reference number shows what you hold. For fixed and enhanced protection, if you applied before 15 March 2023, new pension savings from 6 April 2023 no longer cost you the protection; if you applied on or after that date you must keep meeting its conditions (gov.uk, losing your lifetime allowance protection). gov.uk also says you may be able to apply to protect your allowances from the April 2016 reduction if you had pension savings then.

Q How has LTA abolition changed pension contribution strategy?

Before 6 April 2024 the Lifetime Allowance put a tax charge on large pensions, so many people stopped contributing as they approached it. Now there is no charge on total pension size, and the limits that matter are these. The annual allowance is £60,000 in 2026/27. Unused allowance can be carried forward from the previous 3 tax years; it was £60,000 in each of 2023/24, 2024/25 and 2025/26, so up to £180,000 can be carried forward, or £240,000 in 2026/27 including the current year, if none was used. The tapered annual allowance applies only if threshold income is over £200,000 and adjusted income is over £260,000. The money purchase annual allowance of £10,000 applies once you have flexibly accessed a pension. Employer contributions, including through salary sacrifice, also avoid employer National Insurance (15% in 2026/27). The LSA caps tax-free cash only, not the pension.

Q What happens to drawdown once the LSA is used up?

Once your LSA is used up, no further lump sum can be paid tax-free, and there is no more tax-free cash when you crystallise. The rest of the pot can still be taken as drawdown income, an annuity or lump sums, all taxed as income at your marginal rate in the year paid. Spreading withdrawals over several tax years, so each year's income stays in lower bands, is the main lever. Example for 2026/27, England, Wales or Northern Ireland, no other income: drawing £50,270 in a year uses the £12,570 Personal Allowance and the £37,700 basic-rate band, so the Income Tax is £7,540. Any State Pension or other income counts towards the same bands.

Q What is the Overseas Transfer Allowance?

The OTA, £1,073,100 as standard, limits how much you can transfer to a qualifying recognised overseas pension scheme (QROPS) without the 25% overseas transfer charge. gov.uk: if no exclusion applies, the 25% charge is due on the whole transfer; if an exclusion applies but the transfer is more than your available OTA, 25% is charged on the excess. The exclusions are: you live in the same country as the QROPS; it is an occupational scheme and you work for a sponsoring employer; it is an overseas public service scheme and you work for a participating employer; or it is an international organisation's scheme and you work for that organisation. From 30 October 2024 transfers to a QROPS in the EEA or Gibraltar lost their own exclusion, so they are charged unless one of those applies. Tax in your new country of residence also matters; take regulated advice before transferring.

Q How are pensions left to charity treated for IHT?

A lump sum death benefit paid to a charity does not use the LSDBA (HMRC PTM172000), and from 6 April 2027 death benefits passing to a charity stay exempt from Inheritance Tax. Example: a single person dies on or after 6 April 2027 with an unused £550,000 pension as the whole estate and the £325,000 nil-rate band unused. With no gift, IHT is £225,000 × 40% = £90,000 and the children receive £460,000. With £50,000 nominated to charity, IHT at 40% is £175,000 × 40% = £70,000 and the children receive £430,000, so the gift costs them £30,000. gov.uk describes a reduced 36% rate when you leave 10% or more of the net value to charity in your will; if it applied here, IHT would be £63,000, the children would receive £437,000 and the gift would cost them £23,000. Either way the gift reduces the family's share; it does not increase it. If the death is at 75 or over, the children also pay Income Tax on what they draw.

Q What should I review in LSA and LSDBA planning?

A checklist: how much of your LSA and LSDBA earlier tax-free lump sums have already used; whether you hold a protection (primary, enhanced, fixed or individual) and its certificate; your beneficiary nominations, bearing in mind the spouse, civil partner and charity exemptions from 6 April 2027; whether to take tax-free cash in one go or in stages; how withdrawals will fall across tax years and bands; whether the money purchase annual allowance applies once you flexibly access a pension; unused annual allowance you can still carry forward; your State Pension forecast; and, if you may live abroad, the overseas transfer rules. For larger or more complex pensions, regulated financial advice is worth considering.