The Scrapping of the Lifetime Allowance: What It Means for Your Pension

In a landmark change to UK pension rules, the Lifetime Allowance (LTA), a cap on the amount of money you can build up in your pension pots without incurring extra tax, was officially abolished from 6 April 2024. This reform has significant implications for both the tax-free cash you can access and how the rules apply to personal pensions and final salary (defined benefit) schemes.

What Was the Lifetime Allowance?

The LTA was a limit on the total value of all pension savings a person could accumulate without facing hefty tax charges. Prior to its abolition, the LTA stood at £1,073,100. Amounts above this threshold were taxed at rates of 25% (if taken as income) or 55% (if taken as a lump sum) on top of standard income tax.

What Has Changed?

As of April 2024, the LTA has been entirely removed, meaning:

• There is no longer a cap on the total pension savings you can build up without facing additional tax charges.
• Tax treatment now focuses on how and when you take money from your pension, rather than how much you’ve built up.

Impact on Tax-Free Cash (Pension Commencement Lump Sum)

The most common question from pension savers is whether the removal of the LTA allows unlimited access to tax free lump sums. The answer is, not entirely.

What remains:

• You can still take up to 25% of your pension pot as a tax-free lump sum, technically known as the Pension Commencement Lump Sum (PCLS).
• However, the amount you can take tax-free is capped at £268,275, which is 25% of the old LTA.

Exceptions:

• If you have protected tax-free cash rights from before April 2006 or certain types of LTA protections (like Fixed or Individual Protection), you may be entitled to a larger tax-free amount.

How This Affects People with Personal Pensions

For individuals with defined contribution pensions (like personal pensions or workplace pensions), the removal of the LTA:

• Removes the risk of being penalised for having a large pension pot.
• Encourages continued pension savings without fear of breaching limits.
• Still limits tax-free lump sums to £268,275, unless you have existing protections.

This is particularly beneficial for high earners, entrepreneurs, and senior professionals who previously stopped contributions to avoid tax penalties.

How This Affects People with Final Salary (Defined Benefit) Schemes

For those with final salary schemes, the implications are more nuanced:

• These pensions were previously tested against the LTA by multiplying the annual pension by 20.
• The removal of the LTA means no further lifetime allowance tests will apply — good news for long-serving public sector workers or those with large DB entitlements.

However:

• The tax-free lump sum is still restricted to the equivalent of 25% of the LTA (unless protections apply).
• If your scheme offers a tax free lump sum in addition to your pension (like some public sector schemes), you may still be limited in how much you can take tax-free.

Final Thoughts

The removal of the LTA simplifies pension planning and removes a major barrier for those wanting to grow their retirement savings. However, the cap on tax-free cash remains a limiting factor, and the interaction with existing protections or final salary scheme rules may still require professional advice.

If you’re close to retirement or have a large pension pot, it’s worth reviewing your situation. Contact ken@mcneilstevens.com or call 07590 828227