What replaced the pension lifetime allowance and what changed for employees?

Saving money for the future with tax relief and other tax advantages is a significant, if underappreciated, benefit of pensions. With the lifetime allowance (LTA) now abolished, what does this mean for workplace pensions and employee savings? 

Goodbye LTA. Hello LSA and LSDBA

The pensions lifetime allowance is no more. Up until last tax year, it was the upper limit for how much someone could save in their pensions over their lifetime without paying an additional tax charge. It was set at £1,073,100. But from the 2024/25 tax year, this limit has been removed. 

Now, instead of the LTA, people in the UK have two new tax-free savings limits: 

• Lump sum allowance (LSA) is a monetary limit on the 25% tax-free cash lump sum that can be withdrawn from a pension. 

• Lump sum and death benefit allowance (LSDBA) is the overall tax-free lump sum limit that can be taken by the saver and their dependants.   

There have also been changes to two existing tax-free savings limits: 

• Annual allowance (AA) is the yearly limit on pension savings – it’s risen from £40,000 to £60,000 a year. 

• Money purchase annual allowance (MPAA) is a limit on saving into a pension after withdrawing from it – it’s risen from £4,000 to £10,000 a year. 

We’ll explain the new tax-free pension allowances in more detail shortly. First, let’s take a look at the story behind the change. Do employees stand to benefit? And if so, who? 

Why have tax-free allowances changed for employees?

Before it was axed, the pensions lifetime allowance went unnoticed by most people. After all, having a million pounds in your pension was only realistic for high earners. But when they did notice, it was often because they were facing a tax bill they didn’t expect, having exceeded the allowance without realising. 

Now, without the lifetime allowance holding them back (although there are still the tax limits), high-earning employees only have to think about the annual allowance while saving in a pension. And with a higher upper limit – now up to £60,000 – they can put more money away each year in a tax-efficient way.  

When the time comes to draw from their pensions, employees will have a little more thinking to do in terms of tax, thanks to the new LSA and LSDBA. If they’re high earners, it may impact how they choose to access their savings 

As the LTA legislation is still being worked out, there are a few grey areas. Employees who are approaching retirement now with high pension balances should follow the developments closely. 

How the ‘lump sum allowance’ for pensions works

As has always been the case, when an employee withdraws money from their pension pot, at or after age 55, they can choose to take the first 25% as a tax-free cash lump sum (the rest is subject to income tax). 

Previously, this was the case no matter how large the pension pot. But now, the lump sum allowance (LSA) introduces an upper limit of £268,275 in tax-free cash.  

For most employees, it will make no difference. It’s those higher earners again who could feel the limitation.  

How the ‘lump sum and death benefit allowance’ for pensions works

The LSDBA is another limit on tax-free cash, but it only becomes relevant in specific circumstances when other types of cash lump sum become available. As a combined total for all these types, the allowance sets an upper limit of £1,073,100 in tax-free cash. 

This total includes: 

• The ‘serious ill-health lump sum’ available to people with a severely reduced life expectancy. 

• The money that beneficiaries can receive if the pension-holder dies before age 75. 

• Plus anything already taken from the pension and accounted for by the LSA. 

Final thoughts for employers to consider 

Article by

NatWest Cushon