In last year’s Spring Budget, the government announced the lifetime allowance (LTA) would be scrapped from 6 April 2024. Up until 5 April 2024, the LTA was the amount an individual could build up across their pension pots before paying a tax charge. It was introduced back in 2006 and was intended to simplify the way pensions were taxed. Since 2006, the LTA has been through many changes with the amount ranging from £1 million to £1.8 million.
As well as scrapping the LTA altogether, Chancellor Jeremy Hunt increased the annual tax-free pension allowance from £40,000 to £60,000 a year, and the money purchase annual allowance (MPAA) from £4,000 to £10,000. These three changes were aimed at encouraging an estimated 3.5 million people in their 50s back into the workforce.
What was the lifetime allowance?
Before it was scrapped, the LTA stood at £1,073,100 (2023/24). This meant that any amount an individual saved over the LTA would be taxed as income at your marginal tax rate when withdrawing. Your marginal rate of tax is the highest tax bracket into which your income falls. So if you had a pension pot worth £1.2 million, you’d have been £126,900 over the LTA. This is the amount that you would’ve been taxed at either:
- 55% if you took it as a lump sum; or
- 25% if you took it any other way, for example to buy an annuity or via drawdown.
Income tax would then be paid on any further pension withdrawals.
What is replacing the lifetime allowance?
The LTA is being replaced with three different allowances.
The lump sum allowance (LSA) - you can take 25% of your pension as Pension Commencement Lump Sum (PCLS), also known as tax-free cash, once you’ve reached age 55 (rising to 57 from 2028). This allowance is per person, not per pension scheme so the maximum you can take across all of your pension pots is £268,275.
The lump sum and death benefit allowance (LSDBA) - set at £1,073,100, this allowance incorporates both tax-free lump sums someone takes while alive and lump sums paid on death. If someone passes away before the age of 75, death benefits are paid tax-free to the beneficiaries. Any death benefit payments made in excess of the £1,073,100 limit will be taxed at the beneficiary’s marginal rate of income tax. Find out how you can set up your beneficiaries in your PensionBee account.
The overseas transfer allowance (OTA) - set at £1,073,100, is a separate allowance which is reduced by any transfer payments made to a qualifying recognised overseas pension scheme (QROPS).
These allowances may be higher if the individual has lifetime allowance protection - a safeguard HMRC put in place to protect pension savings from previous reductions in the LTA. If you built up a sizeable pension pot before 6 April 2006 and registered for enhanced and/or primary protection with HMRC then this may mean you have a higher LSA or LSDBA. There are a further two protections applicable to eligible pension savers:
Find out more about these on our pension glossary.
How much can I put into my pension now?
When the Chancellor scrapped the LTA, he also raised the tax-free annual allowance to £60,000 or 100% of your salary (whichever is lower). This increase to the pension annual allowance was the first rise since April 2010.
For example, Jane, 55, is on an annual salary of £50,000 and pays around £5,000 a year into her workplace pension. Her employer pays in another £4,000 so her total pension contributions are £9,000 a year. She inherits a sum of £100,000 and wants to put some of that into her pension. After her usual pension contributions are taken into account she can put in an extra £41,000 (her £50,000 income minus the £9,000 that’s already gone into her pension pot via contributions).
If I’m retired can I still put money into my pension?
When the Chancellor raised the annual pension allowance he also increased the money purchase annual allowance (MPAA) to £10,000. The MPAA‘s the amount of money someone who has already retired can put into their pension each year before tax. By raising this allowance the government hopes to encourage early retirees back into work. It’s estimated that in 2020/21, a quarter of pension savers over 55 contributed more than £4,000 to their pensions.
Will the lifetime allowance be re-introduced?
With a UK general election due at some point this year, there’s speculation an incoming Labour government may bring back the LTA. The removal of the allowance shouldn’t be taken for granted, so pension savers should consider using the new higher allowance(s) while they’re available.
Samantha Downes is a financial journalist and has written for most national newspapers and women’s magazines. She is also the author of two finance guides and has set up the Substack PumpkinPensions to help guide people looking to save more towards their future.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
