Lifetime Allowance (LTA)
The LTA was abolished from 6 April 2024.
Most people weren’t affected by the LTA, but if you were close to the limit, you may now be able to save more without triggering a tax charge. However, there’s still a cap on how much you can take tax-free at retirement.
Lump Sum Allowance (LSA)
You can take up to £268,275 tax-free from your pensions, 25% of the former LTA. Anything above this is taxed as income. If you have LTA protection, your limit may be higher.
Lump Sum and Death Benefit Allowance (LSDBA)
Set at £1,073,100, this limits tax-free payments on death or serious ill health. It’s reduced if you’ve already taken tax-free cash (covered by the LSA above).
Pension Commencement Excess Lump Sum (PCELS)
If you exceed your LSA but have certain protections, you may still take a lump sum, taxed at your income rate. Check if you have these protections and how they apply.
The legal changes were confirmed on 23 February 2024.
The Annual Allowance (AA)
The AA is the maximum you can contribute to your pensions each tax year while still receiving tax relief. For 2025/26, the standard limit is £60,000.
Your pension AA can be reduced from the standard £60,000. This happens if your adjusted income goes over £260,000 and your threshold income is above £200,000. For every £2 you earn above £260,000, your allowance drops by £1, until it hits the minimum of £10,000. This is called tapered annual allowance.
If your total contributions go over this amount, you won’t get tax relief on the excess and may need to pay a tax charge.
If your pension savings exceed your individual Annual Allowance, you may be liable for a tax charge. In this case, you can use the Scheme Pays option to have the tax paid directly from your scheme benefits, helping to manage the cost.
Inheritance Tax
Under new government proposals, your pension may be included in an assessment for Inheritance Tax from 2027.
IHT is a tax on the estate (the property, money, and possessions) of someone who has died. In the past, pension savings have not typically counted towards the value of a person’s estate for IHT purposes – so, for example, if you died before retiring and had pension savings worth £100,000, that sum could be passed to your dependants tax-free without being factored into IHT calculations.
From April 2027, inherited pensions will be included in IHT. More details are still to come regarding how this will work in practice, but it may mean more people’s estates exceed the IHT thresholds and therefore trigger a tax payment.
Here’s a reminder of the IHT thresholds:
- The first £325,000 of any estate can be inherited tax-free, rising to £500,000 if the estate includes a residence passed to the direct descendants, and £1 million when a tax-free allowance is passed to a surviving spouse or registered civil partner. Inheritance that exceeds these thresholds is taxed at 40%.
- From April 2026, the first £1 million of combined business and agricultural assets will attract no IHT, but assets over £1 million will be taxed at an effective rate of 20%.
To find out more about IHT, visit gov.uk/inheritance-tax and read the Inheritance tax on pension funds and death benefits guide.
The 2025 Autumn Budget will take place on Wednesday 26 November, please check the news section of the Plan website shortly after to see how this may affect your pension.