The Lifetime Allowance was the maximum you could save in your pensions over your lifetime, without having to pay any extra tax charges when you took money out of them, ignoring any income from the State Pension.

However, on April 6 2023 this allowance was abolished. Chancellor Jeremy Hunt announced in the Budget that the allowance was to be abolished to encourage pension savers to stay in the workplace longer.

Stephen Lowe, group communications director at retirement specialist Just Group, said: “The removal of the Lifetime Allowance releases people to save as much as they like but for many it will be irrelevant, as the Chancellor himself indicated the obvious winners are doctors in the defined benefit NHS pension scheme.”

Get a free no-obligation pension consultation

Pension advice can help you get the most out of your retirement income, helping you on your way to a secure financial future. If you have more than £75k in pension savings, take the first step by arranging a free, no-obligation initial consultation with an expert from Aviva Financial Advice. Any recommendations advisers make will be for products from Aviva and other carefully selected partners. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Capital at risk.

Book my free call

What’s happened to the Lifetime Allowance?

The pensions Lifetime Allowance will be abolished entirely from 6 April 2024, and the tax charge for breaching the allowance hasn’t applied since April 2023. It was originally due to remain frozen at £1,073,100 until April 2026. However, the maximum pension tax-free cash lump sum that you can take has been capped at £268,275, or 25% of the current Lifetime Allowance. This means that even though it’s now possible to build a larger pot without incurring a tax charge, your tax-free cash lump sum won’t increase with it.

This marks a dramatic change from the government’s previous announcement in the March 2021 Budget that the Allowance would remain frozen until the 2025/26 tax year.

The Lifetime Allowance might sound an enormous amount – and of course by most people’s standards it is – but those who’ve saved into a pension over the course of several decades may find they end up with retirement savings in excess of this amount, especially if they’ve been lucky enough to belong to a final salary (or defined benefit) pension scheme. With this type of pension, you’ll receive a guaranteed income at retirement, which is usually based on how many years you’ve belonged to the scheme and a proportion of your final year’s pay.

Why has the Lifetime Allowance been abolished?

Chancellor Jeremy Hunt announced in the Budget that the Lifetime Allowance would be abolished in a bid to encourage pension savers to stay in work longer and pay into their pensions without worrying about additional tax charges. In particular, the move is aimed at encouraging NHS consultants and GPs with generous pensions back to work, or to remain in work for longer.

The Lifetime Allowance had previously been frozen to generate more revenue for HMRC. Keeping it at its current level until 2026 was expected to raise £990m for Treasury coffers through a process known as ‘fiscal drag’ – where the threshold no longer rises in line with increases in living costs and inflation.

However, there remains some uncertainty for pension savers, as Labour has pledged to reinstate the Lifetime Allowance if it gains power after the next general election. Critics claim that it provides wealthy pension savers additional shelter from Inheritance Tax (IHT) because money held in a pension is usually exempt from IHT. The abolishment of the allowance means that pensions may increasingly be used as a tax-efficient way for the well-off to pass wealth onto the next generation.

Get a free no-obligation pension consultation

Pension advice can help you get the most out of your retirement income, helping you on your way to a secure financial future. If you have more than £75k in pension savings, take the first step by arranging a free, no-obligation initial consultation with an expert from Aviva Financial Advice. Any recommendations advisers make will be for products from Aviva and other carefully selected partners. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Capital at risk.

Book my free call

What happens if my pension savings are approaching or have already exceeded the Lifetime Allowance?

Pension savers who stopped paying into their pensions as they approached the LTA may consider restarting their contributions. Under the Carry Forward rules, they could use their £60,000 annual allowance in the 2023/24 tax year (when this allowance increases), in addition to unused allowances of £40,000 for the previous three years. This makes a total potential £180,000 pension contribution.

However, the rule change won’t help those who retired under the old LTA rules and paid a tax charge for breaching their allowance. If you applied for a protected Lifetime Allowance, you should still be able to take advantage of the benefits of this (read more about this below). How the scrapping of the Lifetime Allowance plays out exactly, though, remains to be seen, and you may want to seek professional financial advice if you’re unsure where you stand.

What were the charges if you exceeded the Lifetime Allowance?

Tax charges could amount to an eye-watering sum under the previous Lifetime Allowance rules. Any amount over your Lifetime Allowance taken as a lump sum, for example, would have been taxed at a flat rate of 55%, whereas if you’d made cash withdrawals via drawdown or received the money as regular pension payments, instead of the flat rate of 55%, you’ll have been taxed an additional 25% on top of any regular income tax payable on your pension income.

Let’s take, for example, the Lifetime Allowance in the 2022/23 tax year. If you wanted to crystallise your pension and take a £10,000 lump sum from it, and it had a value of £1,083,100, tax would have been applied to the £10,000 which is in excess of the £1,073,100 Lifetime Allowance. If you took the £10,000 as a lump sum you’d have paid £5,500 tax (55%), but if you’d taken it as income through drawdown or an annuity you’d pay £2,500 (25%), plus income tax.

While the Lifetime Allowance no longer applies, there are various other pension allowances you need to get to grips with. These include the pensions Annual Allowance, where most of us can pay up to a maximum of £60,000 a year into our defined contribution pensions. However, once you’ve started taking money out of your pension, this Annual Allowance falls from £60,000 to £10,000 in 2023/24 and becomes known as the Money Purchase Annual Allowance (MPAA). You will still receive tax relief on any new top up savings up to the £10,000 limit in the 2023/24 tax year. You can learn more about how the various pension allowances work in our article Understanding your pension allowances.

What are the new pension allowances?

There were some important announcements about the changes to the Lifetime Allowance in the Chancellor’s Autumn Statement. Two new allowances will come into force when the LTA is abolished – the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefits Allowance (LSDBA).

Lump Sum Allowance

The Lump Sum Allowance is set at £268,275, or a quarter of the current £1,073,100 LTA. This is the maximum you can take as a tax-free lump sum from your defined contribution pension from age 55 (unless you have protected your allowance, which you can read about below).

Lump Sum and Death Benefit Allowance

The Lump Sum and Death Benefit Allowance is a combined allowance that will be used to determine how much can be paid as a tax free lump sum during your lifetime and on your death. The total allowance amounts to the current LTA, at £1,073,100. There are a number of lump sums that will be tested against this allowance, including: defined benefit death benefits, pension and annuity protection lump sum death benefits, drawdown pension fund lump sum death benefits and flexi-access drawdown lump sum death benefits.

Calculate your pension

Use the Rest Less pension calculator to find out how much you might need to save for retirement, how much your pension pot could potentially be worth and how long it could last.

Calculate my pension

What if I protected my pension Lifetime Allowance?

If you had pension savings above the Lifetime Allowance in previous tax years, you may have applied for protection to avoid a large tax bill. The government’s scrapping of the Lifetime Allowance originally seemed to suggest that pension savers risked losing their protected higher tax-free cash lump sum. However, provided the protection was registered for before 15 March 2023, savers will be allowed to keep their higher tax-free cash protection and, in some cases (depending which protection they have) pay more into their pension pot.

Protections were originally designed in recognition that many people would have saved into their pension pots expecting a much higher allowance.

Over the years there have been a number of different types of protection which continue to function for anyone that holds them:

Individual protection 2016

If you had over £1m in your pension savings on 5 April 2016, you may have been eligible for Individual protection which will provide you with a Lifetime Allowance protection of £1.25 million or the value of your pension savings at 5 April 2016 (whichever was lower). You are able to continue paying into your pension if you wish above your protected Lifetime Allowance.

Fixed protection 2016

You could apply for fixed protection 2016 if you or your employer had not added to your pension savings since 5 April 2016 or if you’d opted out of any workplace schemes by 5 April 2016. Fixed protection effectively fixed your Lifetime Allowance at £1.25 million, but you were no longer able to contribute to your pension.

If you have fixed protection that keeps your Lifetime Allowance at a particular level, you may be considering starting to make contributions again. However, this isn’t necessarily a simple decision. If you made further contributions in the 2022/23 tax year, you would lose your fixed protection, which entitles you to withdraw a tax-free lump sum of 25% of the greater amount. That will be higher than the amount of tax-free cash you can draw from 6 April, when it will be capped at £268,275. In the 2023/24 tax year, however, you can make further contributions without losing your entitlement to the higher value tax-free lump sum.

Where to get help

If you’re concerned about how to manage your pension allowances, you might want to get advice from a qualified financial adviser. It can be a complex area however, where it will almost certainly pay to get tailored professional advice for your personal circumstances in order to avoid falling foul of the rules and facing tax charges.

If you’re 50 or over and have a defined contribution pension, you can get free guidance on the options available to you from the Government’s Pension Wise service. You may also want to get in touch with the Pensions Advisory Service.

However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.

If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

Rest Less Money is on Instagram! Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.