Lifetime allowance

Since 6 April 2006, there has been a limit on the pension savings an individual can build up in their lifetime without being subject to additional tax charges, known as the lifetime allowance (LTA).

In the 2023 Spring Budget, the Chancellor announced that with effect from 6 April 2023 there would be no additional tax charge on any benefits over the LTA and, with effect from 6 April 2024, the LTA would be removed completely.

Limit on tax-free lump sums from pensions

Broadly speaking, you can take 25% of the value of your pension as a tax-free lump sum. Whilst the LTA has been removed, a limit has been retained on the maximum amount you can take as tax-free lump sums from all your pensions over your lifetime. This is the Lump Sum Allowance (LSA) and for most people this limit will be £268,275, but in some instances a higher limit may apply. This doesn’t mean you can necessarily take a lump sum of £268,275 – that is the limit that applies on your 25% lump sum.

These tax-free lump sums can be either:

• Pension Commencement Lump Sums – where you commute part of your pension for cash at retirement (or are entitled to a cash sum in addition to your pension).
• Uncrystallised Funds Pension Lump Sums (UFPLS) – where you take money purchase pension savings as a single lump sum. Only 25% of an UFPLS is tax-free. As the Horizon Pension Scheme is a defined benefit scheme, you cannot normally take an UFPLS from the Scheme, but it may apply for other pension savings you have outside of the Scheme.

You are responsible for providing information to your schemes on any lump sums taken from other registered pension schemes.  

If you previously applied for lifetime allowance protection from HMRC, you may be able to take more of your pensions as tax-free cash, subject to 25% of your total benefits.

Any amount you take as cash over the LSA will be taxed as income.

Death benefits

In the event of your death before the end of your guarantee period (for most members this will be five years after retirement, but a longer period applies for some members and you will have been told if this is the case), any remaining pension within your guarantee period will normally be paid as a lump sum. This lump sum is tax-free if you die before age 75 and it’s paid within two years of your death.

From 6 April 2024, there is a maximum amount of tax-free lump sum death benefit that can be paid. This is the Lump Sum Death Benefit Allowance (LSDBA) and for most people it will be £1,073,100.

The following are measured against this allowance:

• Death benefit lump sums from any scheme paid on your death.
• Serious ill-health lump sums paid to you before your death.
• Certain tax-free cash lump sums paid to you before your death.

If these add up to more than the LSDBA of £1,073,100, then tax is paid on the excess.

The above limits on tax-free cash lump sums apply from 6 April 2024. If you have taken benefits already then some of your LSA or LSDBA may be counted as having been used if you come to take more benefits after April 2024. The underlying calculations are complicated so please contact us if you think this applies to you.

Annual allowance

Whilst the lifetime allowance has been removed, the annual allowance is still in force. The annual allowance is a limit on the pension savings an individual can build up in each tax year without being subject to additional tax charges. The standard annual allowance was increased to £60,000 for the 2023/24 tax year and remains at this level for 2024/25. A lower annual allowance might apply for you if you have flexibly accessed your pension savings, or you have a high income.

If you have any queries then please go to the ‘Contact us’ section of the website.