What is the lifetime allowance?

The lifetime allowance (LTA) was an important concept in the world of pensions. It set the maximum tax-relieved pension savings you could accumulate over your lifetime without paying extra tax.

But research from our Get Britain Pension Ready campaign found that 20% of those surveyed were baffled by the term.

This guide explains what the lifetime allowance was. It also covers what has changed since it was abolished in April 2023.

What was the lifetime allowance?

• The LTA set a limit on the total value of pension benefits you could build up throughout your life. These benefits included both workplace and personal pensions.
• As of the last tax year it was in effect (2023-2024), the standard lifetime allowance was £1,073,100. Pension savings exceeding this threshold may have been subject to additional tax.

What were the changes to the lifetime allowance?

• In the March 2023 budget, the UK government decided to abolish the lifetime allowance charge. The changes became legislation on the 6th of April 2023. There will now be no charge for exceeding the LTA.
• The lifetime allowance was fully abolished from the 2024-2025 tax year. This means that the LTA will no longer apply, and there won’t be penalties for exceeding the allowance.

What replaced the lifetime allowance?

In place of the lifetime allowance, the government introduced a few changes:

• Individual Lump Sum Allowance (iLSA):

  This allowance limits the amount of money that can be taken from your pension tax-free. The individual lump sum allowance (iLSA) is £268,275.

  When you take any tax-free funds from your pension(s) this is subtracted from this allowance. The remaining amount (the income part) is then subject to income tax based on the current income tax rates.

  The amount of tax-free cash you can take is limited to 25% of each pension fund you access. The iLSA is the total amount allowed over your pension funds.

• Individual Lump Sum and Death Benefit Allowance (LSDBA):

  This allowance limits the amount of money that can be paid to you or your beneficiaries as a tax-free lump sum. The LSDBA applies at specific events, such as when someone dies or when a serious ill-health lump sum is paid.

  It also considers most tax-free benefits paid during an individual’s lifetime.

  The LSDBA amount is normally £1,073,100. However, this may be higher if you have a protected allowance.

• Overseas Transfer Allowance:

  The standard overseas transfer allowance is £1,073,100. Again, this may be higher if you have a protected allowance.

  You may need to pay an overseas transfer charge when transferring your pension overseas. It’s best to check with your scheme provider as exemptions can apply. If your transfer exceeds the overseas transfer allowance and is otherwise exempt from the charge, you'll incur a 25% charge. This charge applies to the excess amount. If you don't qualify for an exemption, the 25% charge applies to the entire transfer amount.

  The abolition of the Lifetime Allowance (LTA) marks a significant change in the UK's pension system. Previously, the LTA capped tax-relieved pension savings, with any excess subject to additional tax. Since April 2023, this cap has been removed, eliminating penalties for exceeding the LTA.

  New allowances have been introduced to try to simplify the pension tax system. These include the Individual Lump Sum Allowance (iLSA) and the Individual Lump Sum and Death Benefit Allowance (LSDBA).