14 August 2024

An update on the Lifetime Allowance

Since 2006, pension savings have been subject to a Lifetime Allowance (LTA). This placed a limit on the overall value of pension benefits you could build up across all your pensions before having to pay additional tax. For the 2022/23 tax year, the LTA was £1,073,100.

In March 2023, the Government announced that it would be removing the LTA tax charge with effect from 6 April 2023, and it was abolished altogether from 6 April 2024.

What does this mean for you?

Most people wouldn’t have been affected by the LTA but, if you would have been, the changes are good news as you can now save more for your retirement without incurring a tax charge. There will, however, still be a limit on the amount of money you can take as a tax-free lump sum at retirement. You should make sure you’re familiar with the new allowances to avoid unexpected tax charges when it comes to taking your benefits.

The new Lump Sum Allowance

Before these LTA changes, you could take up to 25% of your pension savings as a tax-free lump sum, with the remainder taxed as income. Now, a Lump Sum Allowance (LSA) has been introduced.

This allowance has been set at 25% of the LTA figure at the time of its removal (£268,275). This is now the maximum lump sum you can receive from all your pension savings without a tax charge. If you exceed this limit, the amount over the limit will generally be taxed as income. Members with existing LTA protection may have a higher limit before they are liable to pay the additional tax.

The new Lump Sum and Death Benefit Allowance

There is also a new Lump Sum and Death Benefit Allowance (LSDBA), set at £1,073,100. This limits the tax-free payments that can be made following someone’s death. The limit also applies in circumstances where, due to ill health, someone’s entire pension is converted to a single cash sum.

This limit will be reduced if the person has previously taken tax-free cash sums at retirement (like those covered by the LSA above).

The law concerning removal of the LTA and the introduction of these new allowances received Royal Assent on 23 February 2024.

As ever, we recommend that you take independent financial advice if you think you may be affected by any of the issues in this article.