Pension lifetime allowance

So, what was the pension lifetime allowance? It was basically the maximum amount that you were allowed to withdraw from your pension plans and schemes, tax-free. As the name suggests, it’s a lifetime, rather than annual or monthly, limit. From April 2024, the lifetime allowance was abolished. 

Wait, what?

Yes. From April 2023, the pension lifetime allowance is a thing of the past. This means that you can contribute to your pension without worrying about tax charges.

The limit applied to whether you used your pension as retirement income (i.e. you get it in instalments) or whether it was withdrawn as a lump sum. In the 2022/23 tax year, the limit was £1,073,100. (Random, right?) This amount excluded your state pension but applied to all other pension schemes, including a defined benefit pension from your employer. 

What’s a defined benefit pension? 

A defined benefit pension is a private pension that you’re paid after retirement by your employer, based on your salary and how long you worked there. 

What happened if I went over the pension lifetime limit?

If you went over this limit, you’d be liable to pay Income Tax on your pension withdrawals.

So… what now? 

You can now save up to £60,000 or your total earnings (whichever is lower) per year into savings tax-free.

Previously, if you took any taxable money from your pension, this meant that the yearly amount you could contribute dropped from £40,000 (the previous tax-free allowance amount) to £4,000 😬 but Chancellor Jeremy Hunt has increased this to £10,000.

Read more about the changes from the 2023 Spring Statement here.