The lifetime pension allowance is changing. Does this affect you?

Catherine Alexander
Partner

A pension is one of the best ways to save for retirement because of its tax-free benefits. You receive free money from the government, and your employer if you are part of a workplace pension scheme, every time you make a contribution yourself. Your pension provider invests these contributions and the increase in value of your pension fund is then free from capital gains tax and dividend tax.

However, when you come to withdraw your pension, after the initial 25% which can be taken as tax-free cash, the rest is taxed in the same way as your income (at your marginal rate), and HMRC adds the withdrawals to any other income you earn. This sometimes has the affect of pushing you into a higher tax bracket.

At the moment, with the Lifetime Allowance (LTA) in place, you can save £1,073,100 in your pension pots over the course of your lifetime, without facing any additional tax charge on top of the one applied to the 75% of your retirement fund. But if you have gone over the LTA, any savings over the limit are taxed at 55% for lump sum withdrawals, or 25% if savings are taken as income drawdown (this is on top of any income tax due on the withdrawal paid at your marginal rate). For example, if someone were to withdraw £100,000 as a lump sum from their pension, and this amount exceeded the £1,073,100 threshold, it could trigger a £55,000 tax bill.

But, as announced in the Spring Budget this year, from April 2024 the LTA will be abolished. This means that in future you will be able to save as much as you want into your private pensions, without extra tax being applied when you withdraw your money.

So, does abolishing the LTA affect you? Well, the lifetime allowance only affects you if you have, or are aiming to have, more than £1 million in your pension pot. If you are due to start taking your pension before April 2024, it would be a good idea to speak to your adviser and ensure that you are doing so in the most tax-efficient way, and making the most of your retirement savings. In reality, the number of people who will be affected by this change is very small, it will be the highest-paid (people with more than £1.07 million in their private pension) and those who are approaching retirement.

This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.