3 new pension allowances you may need to know about in 2024

You might have dreamed about your retirement for years – having more time with loved ones, travelling the world, or simply, enjoying a relaxed pace of life.

Of course, achieving this lifestyle means building a substantial savings pot to fund your plans.

So, you may have been delighted by the abolition of the Lifetime Allowance (LTA) on 6 April 2024.

The LTA previously limited the total amount you could accrue in pensions without incurring an additional tax charge to £1,073,100.

However, while the removal of the LTA may seem like good news, there are three new pension allowances you need to know about.

You (or your beneficiaries) can use these allowances to withdraw a lump sum tax-efficiently from your pension when you retire, when you die, or if you wish to transfer some of your pension abroad.

Read on to learn more about the “lump sum” allowances that have been introduced to replace the LTA, and find out how these could affect your retirement plans.

1. Lump Sum Allowance

The Lump Sum Allowance (LSA) is the maximum amount of benefits you can withdraw from all your pension schemes as tax-free lump sums.

You can usually take up to 25% of your pension as a tax-free lump sum when you retire. However, the new LSA caps your 25% at £268,275 (2024/25) – that’s 25% of the LTA at last count. You may have a higher LSA if you previously had a protected LTA.

If you exceed the LSA, you’ll be charged Income Tax at your marginal rate on the excess of what you withdraw.

Remember, each time you take a tax-free lump sum from your pension, you’ll use up some of your LSA.

The LSA effectively replaces the former pension commencement lump sum (PCLS) rules. This means that if you have a defined benefit (DB) scheme and a defined contribution (DC) scheme, you could take a lump sum tax-efficiently from both, provided you don’t exceed the LSA.

There are special arrangements in place if you took benefits from your pension scheme before the new rules came into effect on 6 April 2024. Usually, 25% of the LTA used before this date will be taken off your overall LSA and Lump Sum and Death Benefit Allowance (LSDBA; see below).

If you withdrew less than the maximum tax-free lump sum available, you may be able to request a transitional tax-free amount certificate. This will show how much LSA and LSDBA you have remaining, as well as confirm the percentage of LTA you have used.

However, it’s important to note that if your certificate shows a lower remaining LSA and LSDBA than the standard calculation, this cannot be disregarded or cancelled. So, you may wish to speak to an independent financial planner before deciding if this is a sensible option for you.

2. Lump Sum and Death Benefit Allowance

The LSDBA is the maximum amount of benefits you or your beneficiaries can take from all your pensions as a tax-free lump sum, especially in the circumstances of ill health or death. For the 2024/25 tax year, it’s set at the previous LTA limit of £1,073,100.

Again, you may have a higher LSDBA if you had applied for LTA protection. Additionally, if you used some or all of your LTA before 6 April 2024, your LSDBA will be reduced.

The government website lists 10 circumstances which could trigger the LSDBA. In simple terms, if you’re under 75, any of the following count towards the LSDBA:

• Tax-free lump sums you take under the LSA
• Serious health lump sums
• Tax-free lump sum death benefits.

Each time you take a tax-free lump sum from your pensions or your beneficiaries are paid a tax-free lump sum following your death before the age of 75, you’ll use up some of your LSDBA.

As with the LSA, any benefits taken from your pension that exceed the LSDBA are liable to Income Tax at the recipient’s marginal rate.

3. Overseas Transfer Allowance

If you transfer your UK pension savings to a qualifying recognised overseas pension scheme (QROPS), this will usually be tax-free, provided the benefits don’t exceed the Overseas Transfer Allowance (OTA).

The OTA is set at the same amount as the LSDBA of £1,073,100 (2024/25). However, if you used some or all of your LTA before 6 April 2024, this may be reduced. Conversely, your OTA could be higher if you had taken out LTA protection.

If the amount you transfer exceeds the allowance, any excess may be taxed at 25%. This is called the “overseas transfer charge” (OTC).

A financial planner can help you navigate the new rules and build a tax-efficient retirement plan

Calculating how close you are to exceeding the lump sum allowances may not be straightforward. For example, the LSA and LSDBA are worked out slightly differently, depending on whether you started taking pension benefits before or after 6 April 2024.

Also, the transition from the LTA to the new lump sum allowances has not been smooth. A report in FTAdviser described the abolition of the LTA as “the most chaotic change of the past two decades”.

So, you may benefit from seeking professional financial advice to ensure you withdraw from your pension in the most tax-efficient way. This could allow you to enjoy more of your wealth during your retirement.

Get in touch

If you have further questions about the new pension allowances and how they might apply to you, we can help.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.