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    Changes to the Lifetime Allowance

    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, replaced by two new allowances. These will affect both Defined Contribution and Defined Benefit schemes even though these are managed very differently.

    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 fully into effect until 6th April 2024.

    There may be future amendments to these rules and pension legislation is always subject to change. “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 Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDA) are two new allowances that replaced the Lifetime Allowance. They apply to the tax-free amount of any lump sums you take from your pension pots, either when you retire or when you die. If you exceed these allowances, you will have to pay tax on the excess amount. These allowances are separate from the Annual Allowance, which limits how much you can contribute to your pension each year.

    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.

    Find out more in our recent interview with experts from Wren Sterling and Magnus DFM

    Will these new allowances change how I plan for retirement?

    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 up to age 75, and when you took any of your pension, during any plan withdrawals and at. 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.

    A flow chat to help you understand if the new lump sum allowances affect your financial planning

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

    The new LSA limits the amount that can be withdrawn tax-free, rather than the amount you can save. With this, and the Money Purchase Annual Allowance increasing to £10,000, the MPAA and Annual Allowance to £60,000, 2024 could be the time to contribute to your pension even in retirement, even if you’re already making withdrawals.

    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 after flexibly accessing your 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 Annual Allowance (how much you are able to save into a pension each year without incurring tax) has also increased to £60,000 (tax year 24/25) means that 2024 could be the time to contribute to your pension even in retirement, even if you’re already making withdrawals.

    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.

    Financial Conduct Authority does not regulate tax planning. 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.