What’s changed?

Between 2006 and 2024, there was a maximum amount an individual could save in their pensions in a tax-efficient way – this was known as the ‘lifetime allowance’ or ‘LTA’. Any pension savings above the limit could be subject to a tax charge. The tax charge was abolished on 6 April 2023 and the LTA was abolished on 6 April 2024. 

Instead of the LTA, 3 new allowances will apply from 6 April 2024:

  • Lump sum allowance
  • Lump sum and death benefit allowance
  • Overseas transfer allowance

Lump sum allowance (LSA)

The LSA is the maximum amount you can normally take as a tax-free lump sum from your pension savings. The LSA is currently £268,275. Once you’ve used up all your LSA, any further lump sums would be fully liable for tax.

To help understand how it works, here are 2 examples:

Example 1

  • Amy’s LSA is £268,275
  • She takes a cash lump sum from her pension pot of £20,000
  • As she has unused LSA, she can take £5,000 or 25% of the payment tax free
  • The remainder of the payment, £15,000, is taxed at her marginal rate of 20%
  • She receives a payment of £17,000 and £3,000 is paid in tax
  • Her LSA has been reduced by £5,000 and is now £263,275.

Example 2

  • Jason’s LSA is £268,275
  • He wants to take a regular income from his pension savings of £200,000
  • As he has unused LSA, he can take £50,000 or 25% as a tax-free cash lump sum
  • He then moves the remainder, £150,000, into a drawdown product where he can make regular withdrawals which will be taxed at his marginal rate
  • His LSA has been reduced by £50,000 and is now £218,275.

Lump sum and death benefit allowance (LSDBA)

The LSDBA is the maximum amount of lump sums that can normally be paid to you during your lifetime and in addition, covers lump sum payments when you die, or if you are suffering from a terminal illness. The LSDBA is currently £1,073,100. Once you’ve used up all your LSDBA, any further withdrawals would be fully taxed.

To help understand how it works, here are 2 examples:

Example 1

  • Brian had taken £300,000 in cash lump sums from one of his pensions, which reduced his LSDBA to £773,100
  • Brian then died at age 65 without taking the rest of his pension savings of £500,000
  • As he had unused LSDBA, his spouse received £500,000 tax free.

Example 2

  • Angela died at age 70 without taking any money from her pension savings of £1,200,000
  • As she had unused LSDBA, her spouse received £1,073,100 tax free
  • The remainder of £126,900 was taxed at her spouse’s marginal rate.

If death happens after the individual’s 75th birthday, or payment is made 2 years after we’re notified of the date of death, the whole payment is taxed at the recipient’s marginal rate.

Overseas transfer allowance (OTA)

The OTA is the maximum amount that you can normally transfer to a non-UK pension scheme before incurring a tax charge on the excess. The OTA is currently £1,073,100. Any transfer amounts paid over the OTA are taxed at 25% through the overseas transfer charge (OTC).

Higher allowance entitlement

You may be entitled to a higher allowance if in the past you’ve registered for lifetime allowance protection with HM Revenue & Customs (HMRC).

Transitional arrangements

If you’ve taken some of your pension savings before 6 April 2024, it’s likely that you’ll have used some of your lifetime allowance, and you should have received confirmation from your pension provider of the percentage you used.

If this does apply to you, the percentage used will lower the amount of the new allowances you have available:

  • The LSA will be reduced by 25% of the lifetime allowance used
  • The LSDBA and OTA will be reduced by the lifetime allowance used.

These ‘transitional arrangements’ can be complex, so you may need some help – either guidance or professional advice. Find out more

This webpage contains general information about the abolition of the lifetime allowance, which is based upon our interpretation of the law coming into effect from 6 April 2024.  This information does not constitute legal, financial or other professional advice.