Since 2006, pension savings have been subject to an LTA, which place a limit on the overall value of pension benefits you could build up across all your pensions before having to pay additional tax. For the 2022/23 tax year, the LTA stood at £1,073,100.
In March 2023, the government announced that it would be removing the LTA tax charge with effect from 6 April 2023, and it was abolished altogether from 6 April 2024. These moves have been taken to encourage high earners to remain in employment, rather than retire early to avoid a hefty tax penalty.
What does this mean for you?
Most people wouldn’t have been affected by the LTA but, if you would have been, the changes are good news as you can now save more for your retirement without incurring a tax charge. There will, however, still be a limit on the amount of money you can take as a tax-free lump sum at retirement. You should make sure you’re familiar with the new allowances to avoid unexpected tax charges when it comes to taking your benefits.
The new Lump Sum Allowance (LSA)
Before these LTA changes, you could take up to 25% of your pension savings as a tax-free lump sum, with the remainder taxed as income. Now, an LSA has been introduced.
This allowance (£268,275) has been set at 25% of the LTA figure at the time of its removal. This is now the maximum lump sum you can receive from all your pension savings without a tax charge. If you exceed this limit, the amount over the limit will generally be taxed as income. Members with existing LTA protection may have a higher limit before they are liable to pay the additional tax.
The new Lump Sum and Death Benefit Allowance (LSDBA)
There will also be a new LSDBA, set at £1,073,100. This limits the tax-free payments that can be made following someone’s death. The limit also applies in circumstances where, due to ill health, someone’s entire pension is converted to a single cash sum.
This limit will be reduced if the person has previously taken tax-free cash sums at retirement (like those covered by the LSA above).
Please note: from April 2027, payments upon death may be included in Inheritance Tax. Find out more in the ‘Autumn Budget and your pension’ section.
PCELS (Pension Commencement Excess Lump Sum)
In addition to the new allowances, members with certain protections in place, such as Lifetime Allowance (LTA) protection, may still be able to take a higher tax-free lump sum. For members with benefits exceeding their Lump Sum Allowance (LSA), the Pension Commencement Excess Lump Sum (PCELS) offers an option to take a cash lump sum, which is taxed at their marginal income tax rate. It’s crucial to check whether you hold such protections and understand how they may impact your pension savings.
The law concerning removal of the LTA and the introduction of these new allowances received Royal Assent on 23 February 2024.
We recommend that you take independent financial advice if you think you may be affected by any of the issues in this article. Find an adviser on the MoneyHelper website.