Lifetime allowance - what replaced it?

The old Lifetime Allowance is gone

The Lifetime Allowance was the old cap on how much pension you could build up before an extra tax charge applied. That system was abolished on 6 April 2024.

Its removal did not remove every limit. The new framework simply shifts the focus to how much pension money can be paid out as tax-free lump sums.

In practice:

• there is no longer a Lifetime Allowance charge on the overall value of your pension savings;
• there is still a cap on the total tax-free pension lump sums you can take;
• benefits above the relevant lump-sum allowances can trigger an income tax charge.

The Lump Sum Allowance

The Lump Sum Allowance is the cap most people are really asking about when they ask what replaced the Lifetime Allowance.

You can usually take up to 25% of the amount built up in a pension as a tax-free lump sum, but the most you can normally take in total is £268,275. That is the Lump Sum Allowance.

It is a lifetime total across all your pension schemes, not a per-provider figure. If you take tax-free cash from several pensions over the years, those amounts are added together against the same allowance.

The cap tends to bite on people with total pension savings above roughly £1,073,100, because 25% of that amount is £268,275. Below that level, the familiar 25% limit is usually the binding rule rather than the cash cap.

The Lump Sum and Death Benefit Allowance

The Lump Sum and Death Benefit Allowance is wider. You or your beneficiaries may be able to take tax-free lump sums of up to £1,073,100 in certain circumstances, such as serious ill-health lump sums and some lump sum death benefits.

Any lump sum that counts towards your Lump Sum Allowance also counts towards this wider allowance.

That matters for inheritance planning and serious ill-health cases. It also means a decision to take tax-free cash during your life can reduce the allowance left for certain tax-free death-benefit lump sums later.

What counts toward the allowance

The following count towards the Lump Sum Allowance:

• pension commencement lump sums;
• the 25% tax-free part of an uncrystallised funds pension lump sum;
• standalone lump sums.

Serious ill-health lump sums and certain lump sum death benefits count towards the Lump Sum and Death Benefit Allowance.

Protected allowances still matter

Some people registered Lifetime Allowance protections when the old allowance was cut in earlier years. If you hold a protected allowance, it may increase the tax-free lump sums you can take from your pensions.

So do not assume the standard £268,275 cap applies if you have old protection paperwork or a provider record showing protected rights. Ask the scheme exactly what it has on file.

How this differs from the Annual Allowance

The Lifetime Allowance replacement rules are often confused with the Annual Allowance. They are separate things:

• the Annual Allowance limits tax-relieved pension input each tax year;
• the Lump Sum Allowance limits the tax-free lump sums you take from pensions;
• the Lump Sum and Death Benefit Allowance covers certain lifetime and death-benefit lump sums.

Contributing too much and taking too much tax-free cash are different problems with different limits.

This is factual information, not financial or tax advice. If your pension is large enough for these allowances to bite, check your provider records and consider regulated advice before taking benefits.