Removal of the Lifetime Allowance: your top three questions answered

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The Lifetime Allowance (LTA), introduced on 6 April 2006, limited the amount of pension benefits a person could build up in their lifetime before having to pay additional tax.  

So, in a bid to make pensions an even more attractive way to save for retirement, the LTA was abolished from 6 April 2024.  

However, while there is now no overall limit on pensions savings, there are new limits on the type and amount of pension benefits your clients can take without incurring a tax charge.  

We know there have been many changes and following the general election, additional changes could be on the horizon - on 17 July we saw the Labour government announce a Pension Schemes Bill which will introduce further reforms for private-sector schemes.  

As we wait to see what this means for our industry, our experts have put their heads together to answer your top three LTA questions:
 

1. What replaces lifetime allowance? 

Since 6 April 2024, three new allowances have been in place which, between them, cap the tax-free pension benefits your clients can access. 

Allowance	Tax-free limit
Lump sum allowance	£268,275
Lump sum and death benefit allowance	£1,073,100
Overseas transfer allowance	£1,073,100

The lump sum allowance is the amount of tax-free lump sum a client can take - it's typically taken as a pension commencement lump sum (PCLS). 

The lump sum and death benefit allowance (LSDBA) covers lump sums which fall under the LSA limit, and the amount of death benefit lump sums or serious ill health lump sums that can be paid tax-free. 

Lastly, the overseas transfer allowance is the amount that can be transferred to a qualifying recognised overseas pension scheme (QROPS) before a tax charge applies. 

Separate allowances mean that benefits that count toward one allowance don’t always count against the others - previously all types of benefits would count towards a client’s total lifetime allowance.
 

2. What are the changes to Benefit Crystallisation Events (BCEs)? 

BCEs worked hand in hand with the lifetime allowance, so there had to be changes to crystallisation events.  

From 6 April 2024, a new concept has also been introduced - a Relevant Benefit Crystallisation Event (RBCE) – and from 6 April 2024, only these events will use up the new allowances. 

RBCEs differ for each allowance, though some events count against two allowances. And a RBCE uses a monetary amount of the new personal allowance, not a percentage as was the case with previous BCEs.
 

3. What are the changes to pension death benefits? 

Death benefit lump sums still work similarly to how they did under the lifetime allowance. However, now they use the LSDBA instead of the lifetime allowance. 

Lump sums will be tax free where: 

• Your client's death is before age 75 
• The lump sum is settled within two years of notification 
• The lump sum doesn't exceed the LSDBA 

Keep in mind that the available LSDBA may have been reduced by any BCEs before 6 April 2024, potentially limiting the amount of tax-free lump sum death benefit available to your clients. 

Any death benefits taken as drawdown or an annuity are not tested against the LSDBA, so are paid tax free on death before age 75.  

Lump sum death benefits paid from benefits crystallised before 6 April 2024 will have been tested against the lifetime allowance, so won’t be tested again against the LSDBA.

Therefore, some drawdown lump sums will be paid tax free (even if the LSDBA has been reduced to zero) and they won't reduce the LSDBA if they’re settled before other pension benefits.
 

Watch our Lifetime Allowance webinar

If you’d like more in depth information on the abolition of the lifetime allowance, and what this means for you and your clients, watch our recent Q&A webinar.