Everything you need to know about the pension rules that replaced the Lifetime Allowance

In the lead up to the recent general election, Keir Starmer caused some confusion over his party’s policy on pensions.

Previously, the party stated they planned to reintroduce the “Lifetime Allowance” (LTA) – the cap on the total amount you could save in your pensions before triggering an additional tax charge.

The Conservative government abolished the LTA on 6 April 2024, meaning that savers can potentially make more tax-efficient contributions to their pensions than before. The removal of the LTA was especially welcome for some doctors, who planned to retire early as they had reached the cap.

Yet, when the government first announced plans to abolish the LTA, Labour said they would reinstate the cap if elected. Fortunately, there was no mention of the LTA in their manifesto and it appears they’ve dropped the policy as they haven’t raised the issue again.

This may be good news for you as it means you can potentially make more tax-efficient contributions to your pensions. However, the government replaced the LTA with several other allowances that might affect you.

Read on to learn about the important pension rules that could affect you following the abolition of the LTA.

The Annual Allowance still limits the tax-efficient pension contributions you can make each year

When you contribute to your pensions, you benefit from 20% tax relief at source. Effectively, this means that a £100 contribution “costs” you £80, with the other £20 coming from the government.

If you’re a higher- or additional-rate taxpayer, you may receive an extra 20% or 25% tax relief, which you can apply for through self-assessment.

However, the LTA limited the total amount of tax-efficient contributions you could make to your pension in your lifetime. Before it was abolished, the LTA stood at £1,073,100 and any savings that exceeded this amount would be taxed when you withdrew them.

If your pension exceeded the LTA, you would have paid:

55% on lump sums
25% on income that exceeds your Personal Allowance (£12,570 in 2024/25).

Fortunately, these charges were removed on 6 April 2023 before the LTA was abolished altogether the following year.

Yet, that doesn’t mean you can make unlimited tax-efficient contributions to your pensions because the “Annual Allowance” still affects you.

In the 2024/25 tax year, you have an Annual Allowance of £60,000 (or 100% of your earnings if lower). You will pay tax at your marginal rate of Income Tax on any contributions that exceed the Annual Allowance.

Additionally, if you’re a high earner or have flexibly accessed a defined contribution (DC) pension, your Annual Allowance may be lower than £60,000.

As such, even though the LTA has been abolished, it’s still important to be aware of how much you contribute to your pension each year to avoid triggering a tax charge.

3 new allowances have replaced the Lifetime Allowance

Since the abolition of the LTA, the government introduced three new allowances. They are the:

Lump Sum Allowance

Normally, you can take the first 25% of your pensions as a tax-free pension commencement lump sum (PCLS) from age 55. You can take it as a single lump sum or several smaller amounts.

However, you have a “Lump Sum Allowance” (LSA) of £268,275 in the 2024/25 tax year. If the total of your PCLS’s exceeds this amount, any additional funds will be taxed at your marginal rate of Income Tax.

Lump Sum and Death Benefits Allowance

The “Lump Sum and Death Benefits Allowance” (LSDBA) – £1,073,100 in 2024/25 – is a cap on all tax-free lump sums that you and your family may receive from your pensions.

For instance, you could receive a lump sum due to serious illness or your family might receive death benefits from your pension when you pass away.

If the total of all tax-free lump sums, including your PCLS’s, exceeds the LSDBA, you or your family may pay tax at your marginal rate on additional benefits.

Overseas Transfer Allowance

If you plan to move abroad and transfer your pensions overseas, you may be affected by the “Overseas Transfer Allowance” (OTA) – £1,073,100 in 2024/25.

When moving your savings to an overseas pension scheme, you may pay 25% tax on any funds that exceed the OTA.

Your allowances may be lower if you used some or all your Lifetime Allowance before it was abolished

If you already accessed your pensions before the LTA was abolished, your new allowances may be reduced.

You may not benefit from any of the new allowances at all if you used your full LTA. Additionally, if you started drawing from your pensions and used part of your LTA before it was abolished, your LSA and LSDBA will be recalculated.

HMRC calculates the new allowances by subtracting 25% of your previously used LTA from the LSA and LSDBA.

If you have Lifetime Allowance Protection, your allowances may be higher

Before the LTA was abolished, certain people could apply for LTA protection. This essentially allowed you to keep your current LTA, even if the rules changed and the allowance fell.

The specific benefits depended on when you applied for LTA protection and how much you had in your pensions at the time.

If you previously applied for LTA protection before 6 April 2024, you may have an increased LSA and LSDBA. That said, there are certain conditions you may need to meet. You could lose your protection if you:

Make new savings in a pension scheme
Are enrolled in a new workplace pension scheme
Transfer money between pension schemes in a way that doesn’t meet transfer rules.

The rules around this can be complex so you may want to seek professional advice to understand precisely what protection you might be eligible for.

Get in touch

We can help you find the most tax-efficient ways to contribute to your pensions.

Please contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.