From 2006 until 5 April this year, pension savings were subject to a Lifetime Allowance (LTA). This placed a limit on the overall value of pension benefits you could build up across all of your pensions before having to pay additional tax. For the 2022/23 tax year, the standard LTA was £1,073,000.

In March 2023, the Government announced that it would be removing the LTA tax charge with effect from 6 April 2023. The LTA was then abolished altogether from 6 April 2024.

What does this mean for you?

Most people weren’t 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.

The new Lump Sum Allowance (LSA)

Before the recent changes, you could take up to 25% of your pension savings as a tax-free lump sum, with the remainder taxed as income. Pension savings in this calculation were limited to 25% of the LTA at retirement. While the LTA is now a thing of the past, a Lump Sum Allowance (LSA) has been introduced.

The LSA has been set at £268,275 – that’s 25% of the LTA figure at the time of its removal (£1,073,100). 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 (LSDBA)

There’s also a new Lump Sum and Death Benefit Allowance (LSDBA), fixed at £1,073,000. 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 new Overseas Transfer Allowance (OTA) is also fixed at the same amount as the LTA at the time of its removal (£1,073,000). This is a limit on the amount that you can transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) without incurring an Overseas Transfer Charge (OTC).