The Lifetime Allowance is gone – but here’s what has replaced it

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The Lifetime Allowance is now officially gone! But, just before you celebrate, let us give you a rundown of the three new allowances that have replaced it and how they could impact your pension.

What was the Lifetime Allowance?

The Lifetime Allowance put a limit on the amount you could build up across all your pension plans in your lifetime before you had to pay an additional tax charge. If you were over the Lifetime Allowance, you’d potentially have to pay a tax charge of up to 55% on the excess. Before it was removed, the Lifetime Allowance was £1,073,100.

What’s changed for me?

Now that the Lifetime Allowance is gone, you don’t need to worry about paying that tax charge anymore. So, if you were close to or over the allowance before, that’s good news. However, that doesn’t mean everything is now tax-free; three new allowances have been introduced that will cap the amount of tax-free benefits you can get.

1. The Lump Sum Allowance

The Lump Sum Allowance limits the amount you can take as a tax-free lump sum (as a total amount across all of the pensions you have). Most people will normally be able to take 25% of their pension savings tax-free, but now you can’t take any more than £268,275 – which is 25% of the old Lifetime Allowance. Anything else will be taxed at your normal rate of income tax.

If you previously had Lifetime Allowance protection on your pension plan that allowed you to take more than £268,275 as a tax-free lump sum, that should still be honoured. 

2. The Lump Sum and Death Benefit Allowance

It’s a mouthful – but it basically means that your beneficiaries (the people you choose to leave your pension to) won’t need to pay the Lifetime Allowance tax charge on your pension when you die.

Previously, if you died after age 75, your beneficiaries would need to pay tax on your pension savings at their usual rate. But they’d pay up to 55% tax on any amount over the Lifetime Allowance as a ‘Lifetime Allowance tax charge’. They don’t need to do this anymore – your whole pot will be taxed at their normal rate if you die after age 75. 

If you die before age 75, your pot will be tax-free up to £1,073,100, and anything over that amount will be taxed at their usual rate.

3. The Overseas Transfer Allowance

This allowance puts a cap on the amount of pension savings that can be transferred out of the UK tax-free. The cap is £1,073,100 (the old Lifetime Allowance) for anyone without protection. Any amount above this will be taxed at 25%.

Still got questions?

The removal of the Lifetime Allowance was really complicated, and it can impact you in different ways depending on things like your age or whether you’ve already started taking your pension or not. If you’ve got questions about how it (or any of these new allowances) will impact you, it could be a good idea to speak to a financial adviser. They’ll be able to give you advice specific to your own circumstances and help you make the right decisions for you.

The information here is based on our understanding in May 2024 and shouldn’t be taken as financial advice. 

Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.