From 6 April 2006 until 5 April 2024, pension savings were subject to a Lifetime Allowance (LTA), which placed a limit on the overall value you could build up across all your pensions before having to pay additional tax. For the 2022/23 tax year, the LTA stood at £1,073,000.

The LTA tax charge was removed with effect from 6 April 2023, and the LTA was abolished altogether from 6 April 2024. These moves have been taken to encourage high earners to remain in employment, rather than retire early to avoid a hefty tax penalty.

What does this mean for you?

Most people weren’t affected by the LTA, but if you would have been, the changes are good news: 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.

Prior to the changes, you could take up to 25% of your pension savings as a tax-free lump sum, with the remainder taxed as income. The new arrangements introduce a Lump Sum Allowance (LSA), which has been set at 25% of the value of the LTA at the time of its removal – i.e. £268,275. This is the maximum lump sum you can receive from all your pension savings. 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.

There is also a new Lump Sum and Death Benefit Allowance (LSDBA), set at £1,073,000. This limits the payments that can be made tax-free following someone’s death or 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 (i.e. those covered by the LSA above).

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.