Lifetime Allowance Advice

The Lifetime Allowance was the total amount you could build up in your pension during your lifetime – without incurring a tax charge. This limit has now been removed, which leaves many reconsidering how they save for retirement.

What is the lifetime allowance?

The Lifetime Allowance limited the amount of pension benefits you could build over your lifetime without a tax charge. While the abolition was announced in March 2023, it did not come into effect until 6th April 2024.

There may be future amendments to these rules and pension legislation is always subject to change. In a recent interview on the removal of the Lifetime Allowance Gareth Hope (Head of Research) summarised this as: “Pension legislation doesn’t get simpler. It only gets more complex. That’s why planning and investment reviews are important. There’s always a potential to change, but you can only focus on the now, and deal with the current legislation.”

Changes to the lifetime allowance

The key difference between the old and new allowances is that new lump sum allowance (LSA) and lump sum and death benefit allowance (LSBDA) only looks at the tax-free portion of any lump sums you take. The lifetime allowance LTA applied to the total value of pension benefits you could build up throughout your lifetime. For those who chose to stop contributing to their pensions because of the previous Lifetime Allowance, the changes should encourage those to save for retirement once more.

There is now no limit to the amount of benefits you can receive, only how much you can receive before tax. This may seem like a small change, but with marginal tax rates, this could make a big difference to those with larger pension savings, and simplify pension tax for those with multiple pension pots.

When did the lifetime allowance apply?

Your Lifetime Allowance was tested at age 75, at crystallisation (withdrawal) events, during any plan withdrawals and at death. Lump Sum withdrawals above the Lifetime allowance would incur tax, and during the 2023/24 tax year, any benefits taken above the Lifetime Allowance were liable to income tax at the recipient’s marginal rate.

 

Introduction of new allowances

The two new allowances replacing the Lifetime Allowance are the Lump Sum Allowance, and the Lump Sum and Death Benefit Allowance. These allowances focus on the 25% of pensions which can be withdrawn tax-free from age 55 (57 from April 2028), as per Pension Freedoms rules.

 

 

What does this mean for my pension?

The new LSA limits the amount that can be withdrawn tax-free, rather than the amount you can save. Those who may have stopped contributing to their pensions and are looking to other investment strategies, they may want to reconsider their financial plans.

What does this mean for retirees who are in receipt of their pension benefits?

The Lump Sum Allowance has been set at £268,275 (for anyone without Lifetime Allowance protection). It’s not by accident that this amount is the same as the previous limit on the maximum amount of tax-free cash. The value of any pension benefits you’ve already taken will be deducted from your Personal Allowances, so that the same amount is left. If you’ve used 100% of the now abolished Lifetime Allowance, your new Lump Sum Allowance will be £0.

This new legislation could also effect people who have started drawing on their pensions. The MPAA (, which limits the amount you can save into your pensions if you have begin to receive benefits) and the Annual Allowance (how much you are able to save into a pension each year without incurring tax) were both increased this year to £10,000 and £60,000 respectively (tax year 24/25) which may also affect your financial planning.

Apply for protection

Just as protections were introduced with each change to the Lifetime Allowance, protections are available to increase tax-free allowances for those who could lose out under the new rules. More information is available on the government’s website, and are available to apply for until the 5th April 2025. If you are concerned that you could be affected by these Allowances, we would recommend that you get in touch to talk to Financial Adviser.

FAQs

  • When was the lifetime allowance removed?

    When was the lifetime allowance removed?

    The Lifetime Allowance was abolished on the 6th April 2024, announced in March 2023. For the tax year 2023/24, the tax charge for exceeding the Lifetime Allowance was removed, creating a transitional period for the legislation.

  • What is lifetime allowance protection?

    What is lifetime allowance protection?

    Protections are available to increase tax-free allowances for those who have pension savings more than the new lower allowances and could lose out under the new rules. More information is available on the government’s website, and are available to apply for until the 5th April 2025.

  • What if I have already taken pension benefits?

    What if I have already taken pension benefits?

    The value of any pension benefits you’ve already taken will be deducted from your Personal Allowances, so that the same amount is left. If you’ve used 100% of the now abolished Lifetime Allowance, your new Lump Sum Allowance will be £0.

  • What was the lifetime allowance charge?

    What was the lifetime allowance charge?

    The Lifetime Allowance was a limit on the amount of pension benefits you could build over your lifetime without a tax charge. It steadily increased from £1,030,000 in TY18/19, again in TY19/20, and finally to £1,073,100 in TY20/21 where it has remained.

  • What is the Money Purchase Allowance?

    What is the Money Purchase Allowance?

    The MPAA limits the amount you can save into your pensions if you have begin to receive benefits. This reduces the amount it is possible to save into a pension without incurring tax charges, and removes the possibility to benefit from ‘double tax relief’. For those who have already received up to their Lifetime Allowance, the changes to these allowances may mean they choose to continue saving for their future, and more people may trigger the MPAA. Find out more in our article on managing the MPAA limit.

The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

Financial Conduct Authority does not regulate tax planning.