It was announced in the Spring Budget last year that the lifetime allowance was to be scrapped in April 2024. Here’s an overview of the changes from 6 April 2024.
In summary, for the majority of people, the amount you can take tax free remains broadly the same. The main difference is how the allowances are described and the way they are applied.
If you’re over the current lifetime allowance of £1,073,100, it’s important to read on to find out if you need to take any action. For those who are under, there are some small changes which you need to be aware of.
Please do get in touch if you have any questions around the new allowances or would like any help.
The new allowances
Here is a brief overview of the new allowances and how they work.
1. New lump sum allowance – £268,275
The new ‘lump sum allowance’, or LSA, applies to the total amount of tax-free lump sums including the tax-free element of any funds you have withdrawn directly from your pension from age 55 (rising to 57 in 2028), without going into drawdown or buying an annuity. You may have seen it referred to as ‘uncrystallised funds pension lump sums’, or UFPLS for short. It means you can leave money in your pension pot and take lump sums from it when you want to – until your money runs out or you choose another option.
2. New lump sum and death benefit allowance – £1,073,100
The new ‘lump sum and death benefit allowance’, or LSDBA, is a limit on the amount of lump sum death benefits and serious ill health lump sums, that can be paid without tax.
If your lifetime allowance was protected, you’ll have a higher allowance based on your protected amount.
How do the new allowances work?
From 6 April 2024 only money taken as a lump sum from your pension (including regular withdrawals where there’s a tax-free element) will be tested against the new allowances.
If either limit is exceeded, the excess is taxed just like any other pension income received. So, if your tax-free amount is used up and you take money out over and above that, then you'll be taxed at your marginal rate.
Tax-free cash is normally 25% of the pension money being taken, but there’s a cap of the lower of the two new allowances.
What if you’ve already used your lifetime allowance?
Your pension provider will assume 25% of your lifetime allowance was taken as a tax-free lump sum and will reduce your new limits (lump sum allowance & lump sum and death benefit allowance) accordingly.
What else is different?
If you have been told about the percentage of lifetime allowance you’ve used in your pension statement, you'll now see the amount of the new allowances instead.
Any money put into drawdown after 5 April 2024 will be put into a separate account, because any lump sum death benefits paid from drawdown accounts started on or after 6 April 2024, need to be tested against the new lump sum and death benefit allowance. You’ll see the new account details on your regular statements.
Importantly, you now need to tell your pension provider about any tax-free lump sums you take from other schemes, instead of the lifetime allowance you've used.
So, do I need to take any action?
If you haven’t taken any of your pension before and the total value of all your pensions won’t exceed £1,073,100 then you don’t need to do anything. The amount of tax-free benefits you receive will be broadly the same.
If you’ve already taken some of your pension and the tax-free amount you received was less than 25% you may be entitled to apply for a new ‘transitional tax-free amount certificate’. This will mean your new allowances will only reduce by the actual tax-free amount paid to you, instead of the 25%. However, you probably won’t need a certificate unless the total value of all your pensions exceeds £1,073,100.
If you think you’re eligible for a transitional tax-free amount certificate it’s important you apply prior to the first time you take a lump sum benefit, after 6 April 2024.
More information is expected to be provided by HMRC shortly regarding the new transitional tax-free amount certificate.
The government previously brought in various protections for people who had sizeable pensions and exceeded the lifetime allowance. There were, and still are, protections that can help you pay less tax by giving you a higher lifetime allowance.
If you were eligible for a higher lifetime allowance, but have not yet applied for this, there’s now a deadline of 5 April 2025 to apply. Click here for more information.
Reminder – what was the lifetime allowance?
The lifetime allowance was the total amount you could build up in your pensions over your lifetime, without paying a tax charge.
The standard lifetime allowance in the 2023/24 tax year was £1,073,100. Where this limit was exceeded, the amount of additional tax you had to pay was dependent on how you took your pension money. Until 6 April 2023 this tax charge was 55% for lump sums or 25% where an income was taken.
In the 2023/24 tax year the additional lifetime allowance tax charge was replaced with marginal rate tax. The maximum amount you could take tax free was usually 25% of your fund, or 25% of your lifetime allowance, if lower. So, if your tax-free amount is used up and you take money out over and above that, then you'll be taxed at your marginal rate.
Here to help
Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.