What is the Lifetime Allowance Pension?

The lifetime allowance pension was a limit on the amount of money you could hold in your pension before facing extra tax charges. It applied to all UK pension savings, including workplace and personal pensions.

However, the government abolished the lifetime allowance in April 2024, meaning pension savers no longer have to worry about breaching this limit. Despite its removal, it is still important to understand how it worked, how it affected pension withdrawals, and what has changed since its abolition.

What Was the Lifetime Allowance?

The lifetime allowance was the maximum amount an individual could save in their pension without facing an extra tax charge. The allowance changed over the years, but before its removal, it was set at £1,073,100. If your pension savings exceeded this limit, you would have had to pay a tax charge on the excess when withdrawing your money.

How Did the Lifetime Allowance Tax Work?

If your pension savings exceeded the lifetime allowance threshold, any money withdrawn above this limit was taxed at:

• 55% if taken as a lump sum

• 25% if taken as income, in addition to regular income tax

The tax was applied when you accessed your pension, whether through lump sums, drawdown, or annuities.

Why Was the Lifetime Allowance Removed?

The government decided to abolish the lifetime allowance in April 2024 to:

• Encourage people to save more for retirement

• Reduce complexity in pension tax rules

• Prevent penalising those with long-term pension growth

• Address concerns about doctors and professionals retiring early due to tax charges

By removing the lifetime allowance, pension savers now have more flexibility in building their retirement funds without worrying about tax penalties.

What Has Replaced the Lifetime Allowance?

Although the lifetime allowance tax charge has been removed, some restrictions still exist on how much you can take tax-free from your pension. The key changes include:

1. The 25% tax-free lump sum is now capped at £268,275 unless you had previous lifetime allowance protections.

2. There is no longer a tax charge for exceeding the previous limit, but withdrawals are still subject to income tax.

3. The annual allowance remains at £60,000, meaning you can still only contribute up to this amount each year before facing tax penalties.

Who Benefits from the Lifetime Allowance Removal?

• High earners and long-term savers who were at risk of exceeding the previous limit

• Doctors, consultants, and public sector workers who were affected by lifetime allowance tax charges

• Those with large pension pots who can now withdraw more without additional penalties

What Does This Mean for Your Pension?

If you were previously worried about breaching the lifetime allowance, you can now continue saving into your pension without fear of tax penalties. However, it is still important to plan withdrawals carefully, as standard income tax still applies.

Final Thoughts

The abolition of the lifetime allowance pension limit is a positive change for many savers, making pensions a more attractive way to build retirement wealth. While income tax still applies, the removal of extra charges means more flexibility in how you use your pension savings.

If you are unsure how this affects your pension strategy, speaking to a financial adviser can help you make the most of the new rules.