Case study: How the new pension allowances work in practice
This article is intended for financial services professionals only. None of the information contained in this article should be received as advice. Pensions are a complicated area of financial planning and IPM suggests that financial advice from a suitably regulated financial adviser is sought before an individual takes any action in respect of their pension savings.
As we approach the Budget, it is a busy time for IPM. The uncertainty around what Rachel Reeves will announce on 26 November has increased the number of benefit payment requests we’ve received in recent months.
You can look at our thoughts as to how the Budget may impact pensions here.
This increase in benefit requests has coincided with the introduction of rules that came into effect over the last couple of years around the amount of tax-free lump sum people can withdraw from pension arrangements such as SIPPs. We previously considered what some of these new rules are and how we arrived here in the first place.
To complement this, we thought it would be useful to work through some case studies to show how these rules could work in practice. These will cover several key areas, including:
- Lump Sum Allowance (LSA) – An upper limit on the amount of tax-free lump sum an individual can withdraw across all their pension savings during their lifetime, set at £268,275 as standard.
- Lump Sum Death Benefit Allowance (LSDBA) – This is an upper limit of the amount of tax-free lump sum that can be paid to beneficiaries in the event of an individual’s death. This is set at the standard rate of £1,073,100. Any tax-free lump sums withdrawn by the deceased during their lifetime would be deducted from the standard rate.
- Transitional tax-free allowance certificate (TTFAC) – A certificate an individual can apply for when they have been disadvantaged by the introduction of the LSA or the LSDBA.
The following case studies are based on IPM’s understanding of HMRC guidance at the time of writing (November 2025). These case studies are based on the individual not having historic protections from the Lifetime Allowance (LTA).
Case study 1: A standard pension commencement lump sum below the Lump Sum Allowance
Howard has a SIPP valued at £800,000. It is fully uncrystallised, and he has no pension savings elsewhere. In November 2025, aged 59, Howard would like to withdraw his maximum pension commencement lump sum (PCLS).
This is a fairly straightforward scenario, as there are no other pension benefits to take into consideration and no previous benefit crystallisation events (BCEs) to consider.
Howard can take 25% of the value of his SIPP, which is 25% of £800,000 = £200,000.
As this amount is below the standard LSA of £268,275, the threshold has no impact here.
Case study 2: A pension commencement lump sum after a previous benefit crystallisation event
Howard’s SIPP is still valued at £800,000. However, on this occasion, a previous BCE on this SIPP took place in 2017/18, which saw him receive a PCLS of £100,000 and use up 40% of his LTA. In November 2025, Howard would like to know the maximum PCLS he can withdraw.
Howard’s uncrystallised benefits are valued at £700,000. Ordinarily, he would be able to receive 25% of this (£175,000) as a PCLS. However, we need to consider the BCE that took place in 2017/18.
As we discussed in our recent article, the move from percentage-based testing against the LTA to monetary-based testing causes an issue for people who wish to take benefits but had already done so. The previous BCE still needs to be considered, but how can this be done?
HMRC has provided a standard calculation to bring any percentage-based testing of the LTA into the new LSA regime. This is 25% of the LTA previously used, multiplied by £1,073,100. The answer to this is then used as a deduction against the LSA.
In Howard’s case, the calculation would look like this:
0.25 x 0.4 x £1,073,100 = £107,310
£268,275 – £107,310 = £160,965
Howard would be restricted to a tax-free lump sum of £160,965 for his relevant benefit crystallisation event (RBCE) in November 2025. As you can see, this is lower than the £175,000, which is 25% of the value of his uncrystallised benefits. The difference (£175,000 – £160,965 = £14,035) would have to be drawn as income and taxed under flexi-access drawdown.
Considering the last scenario, would Howard have benefited from applying for a transitional tax-free allowance certificate?
As we explained in our recent article, there are some instances where the new rules disadvantage individuals who had previously had a BCE between April 2006 and April 2024. If this is the case, an individual can apply for a TTFAC from their pension provider to correct the position.
It is important that calculations are carried out before a TTFAC is applied for, as once this has been issued, it must be used on all future RBCEs. And remember, a TTFAC must be applied for before the first RBCE after April 2024.
Under the standard calculation above, Howard was restricted to a PCLS of £160,965. However, the LTA against which the BCE was calculated was £1 million in 2017/18, which is lower than the £1,073,100 threshold at the time it was abolished.
Therefore, Howard may benefit from a TTFAC; he would be able to use the monetary amount paid as PCLS in 2017/18, as opposed to the figure arrived at by the standard calculation.
Howard took £100,000 as a PCLS in 2017/18, meaning the calculation is £268,275 – £100,000 = £168,275.
By applying for a TTFAC, Howard can receive £168,275 as a PCLS in his November 2025 RBCE, as opposed to the £160,965 figure arrived at using the standard calculation.
We are now going to look at the impact of the LSDBA.
Case study 3: The impact of the Lump Sum Death Benefit Allowance
Howard dies aged 72 in June 2024. At the time of his death, he had a fully uncrystallised SIPP valued at £1.2 million. What is the impact of the LSDBA?
As we have previously looked at, in the event of someone’s death post-April 2024, the value of benefits needs to be valued and tested against the LSDBA. The standard LSDBA is £1,073,100.
Any tax-free lump sums withdrawn by the deceased during their lifetime need to be considered and deducted from the LSDBA to determine the amount of tax-free lump sum that can be paid to the nominated beneficiaries.
In this instance, Howard had not taken any benefits from his SIPP, so the full amount of the LSDBA would apply. As Howard died before 75, his beneficiaries would be able to receive the full value of the LSDBA as a tax-free payment if they choose to.
The balance over the LSDBA (£1.2 million – £1,073,100 = £126,900) would be subject to tax at the beneficiary’s marginal rate.
Let’s keep the previous scenario in mind. However, on this occasion, Howard has also previously drawn benefits from the SIPP; he had taken a £100,000 PCLS payment in 2017/18, which had used up 40% of his LTA.
Like the LSA, we would need to calculate the impact of the BCE from 2017/18 on the LSDBA using the standard calculation. The formula is the same; 25% of the LTA previously used, multiplied by £1,073,100. This would look like the following:
0.25 x 0.4 x £1,073,100 = £107,310
£1,073,100 – £107,310 = £965,790
After this calculation, Howard’s revised LSDBA is set at £965,790. This is the amount of tax-free lump sum that could be paid to his nominated beneficiaries.
Considering the last scenario, would Howard have benefited from applying for a transitional tax-free allowance certificate?
As we have previously considered, there are times when the new rules leave people worse off when it comes to the tax-free amounts that can be paid from their SIPP. Howard’s scenario is one such example, as his BCE from 2017/18 took place when the LTA was £1 million – again, lower than £1,073,100 where it stood when it was abolished.
Even if Howard had no intention of taking a further PCLS from his SIPP, he could still carry out the calculations to see if a TTFAC would benefit his beneficiaries. In fact, Howard’s personal representatives could make an application for a TTFAC after his death, on the basis that an RBCE had not been carried out for Howard since April 2024.
Under the standard calculation above, Howard’s LSDBA was set at £965,790 using the standard calculation. However, as a TTFAC shows that Howard withdrew £100,000 as a PCLS in 2017/18, this figure can be used in the LSDBA calculation instead.
So, this calculation becomes £1,073,100 – £100,000 = £973,100.
By using the TTFAC, Howard’s LSDBA is set at £973,100, as opposed to the £965,790 as set out in the standard calculation.
Get in touch
If you have any SIPP-related queries, or if you have any clients for whom SIPP advice would be beneficial, please get in touch.
Email info@ipm-pensions.co.uk or call 01438 747151.