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. The LTA will also be 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 will also be 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. Some of the more complex details will be confirmed on or before 6 April 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.
Lifetime Allowance video transcript
Pension taxation has changed. Here's what you need to know:
Since 2006, pensions savings were subject to a Lifetime allowance or LTA. It used to be the case that if the total value of all your pension benefits was more than the LTA, you'd have to pay additional tax when taking them. Most people weren't affected by the LTA, but if you were, it could have meant a hefty bill at retirement.
From the 6 April 2024, the LTA was removed. That might mean you can think about saving more or working for longer to build up more pension.
Did you know that you can take a quarter or your pension savings as a tax-free lump sum? That's still the case in the new system, but there's now an upper limit on the lump sum's value. The new Lump Sum Allowance, or LSA, has been set at a quarter of the old LTA's value. Any lump sums greater than that will be taxed.
There is also a new lump sum and death benefit allowance set at just over £1 million. This limits the tax-free payments that can be made when someone dies. It also applies if someone's entire pension is converted to a single lump sum due to ill health, and it can be reduced if some tax-free cash sums have already been taken.
If you think these new measures might affect you, we recommend that you take independent financial advice. MoneyHelper can help you to find an independent financial adviser in your area.
We hope that's made things a little clearer and a bit less taxing.
