In April 2024 the lifetime allowance will be abolished and a new ‘lump sum allowance’ will be introduced. Here’s some standard wording you can use to help you talk to your members about the changes.
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What’s changing and what it means for you
This affects how much can go into your pension:
- in a year, known as the annual allowance
- over your lifetime, known as the lifetime allowance
- once you’ve started taking your defined contribution (DC) pension, known as the money purchase annual allowance.
This also affects the maximum tax-free cash that you can take from your pensions, known as the lump sum allowance. Here’s what’s changed and how it might affect you.
Annual allowance
The total amount that can go into all of your pensions each year without paying extra tax is called the annual allowance. This is now set at £60,000 a year. If you build up pension savings in a defined contribution (DC) pension, your annual allowance is based on how much money you and your employer put into your pension. If you build up benefits in a defined benefit (DB) pension, your annual allowance is based on how much the value of your pension increases over the year.
Lifetime allowance
The limit on how much can go into your pension over your lifetime is known as the lifetime allowance. Until April 2023, if you went over this amount you had to pay a tax charge. From April 2023 no one had to pay a tax charge for the tax year 2023-2024. And from April 2024 this limit will be abolished.
But, there is a limit on the maximum tax-free cash (lump sum allowance) that you can take from your pensions.
Lump sum allowance (tax-free cash)
When you reach the age of 55 (57 from April 2028) you can take up to 25% of your pension as tax-free cash. There is a maximum amount that you can take as tax-free cash. For most people this is now set at £268,275. Any cash that you take from your pension after that is likely to be taxed.
Most people will not be affected by this limit. But if the value of all of your pensions combined is worth more than around £1 million this might affect you.
Some pensions have a feature that allows you to take more than 25% of your pension as tax-free cash – often called ‘lifetime allowance protection’ or ‘lump sum protection’. This feature is rare. To find out if you have it, you should speak to your pension provider or to a financial adviser.
Tapered annual allowance
If you are a high earner, your annual allowance might be reduced. This is known as the ‘tapered annual allowance’. Before April 2023 the tapered annual allowance applied to anyone with total taxable earnings above £240,000 in a tax year. This has now gone up to £260,000. So if your total taxable earnings go above £260,000 in a tax year you might be affected.
Total taxable earnings include any pension contributions made by you or your employer. The tapered annual allowance means that for every £2 of total taxable earnings above £260,000, your annual allowance will be reduced by £1. This particular tax limit is complex, so you should seek financial advice if you think you might be affected.
Money purchase annual allowance
If you’ve already started taking money from one or more of your defined contribution (DC) pension pots you can now save up to £10,000 a year into another DC pension. Once you reach £10,000, you’ll start paying tax on the money that you save. This is particularly relevant for you if you are already using some of your pension savings but continuing to work and save into a different pension.
Things to think about
Check whether these limits affect you
Checking your payslips, pension statements or online pension accounts will help you understand how much you’re putting into your pension at the moment.
Think about what you’re aiming for
The retirement living standards help you picture what your life might be like once you stop working, and how much that lifestyle could cost you. If you know how much you’ve put into your pensions, and what it’s likely to be worth when you retire, you can use the living standards to see whether you’re on track for the lifestyle that you want. Find out more at retirementlivingstandards.org.uk
Get free guidance
If you are over 50 and have a defined contribution (DC) pension you can get free guidance from Pension Wise. The guidance is available face-to-face, or on the phone. Find out more at pensionwise.gov.uk
