After threatening pension savers for months that they planned to re-introduce the Pension Lifetime Allowance if elected to government, Labour appears to have scrapped this idea, for now.  

Of course, no promise or plan can be set in stone. Labour says this now but once comfortable in government who knows what they might change. Circumstances change and tax policies along with it.  

So, should you be worried about saving too much into a pension?  

Is now the time to take your money out?  

It’s best not to make any rash decisions until you understand the real position in more detail.

 

 

Pension Lifetime Allowance rules 


The pension Lifetime Allowance was introduced back in 2006. The purpose of it was not to limit the amount of money that can be saved into a pension, but instead to limit what could be taken out without an extra tax charge.  

For example, someone could in theory save £10million into a pension and not pay any Lifetime Allowance tax charge until they withdrew over the limit.  

The charge for taking out more than the Lifetime Allowance was dependant on how you took your benefits (lump sum or income) and could have been up to 55% of the withdrawal. 

In April 2024 the Conservative government abolished the Lifetime Allowance in its current form.  

It has never removed it completely.  

What has come in its place is actually probably more confusing.  

We now have two new allowances: 

  1. The Lump Sum Allowance.
  2. The Lump Sum and Death Benefit Allowance. 


The Lump Sum Allowance restricts how much tax-free cash you can take out of your pension to £268,275 (at the time of writing). 

So, if you have a pension valued at £1,000,000 and you have not made any withdrawals so far, you will usually have the option to take a tax-free cash lump sum of 25%. So, in this case £250,000 could be withdrawn tax free from pension age without charge. 

However, if your pension was valued at £1,500,000 you would not be able to take 25% tax free as the new Lump Sum Allowance will restrict you to £268,275. 

It in fact was always the case under the previous Lifetime Allowance rules that you could only ever take up to 25% of the Lifetime Allowance tax free. They have just jigged the rule around. 

As for the Lump Sum Death Benefit Allowance. This effectively restricts how much of your pension you can pass onto a beneficiary to £1,073,100 (at the time of writing) before they have to start paying Income Tax on it. 

For example, if your pension was valued at £1,000,000 on your death and you died under age 75, the beneficiary of your pension could make unlimited withdrawals tax free.  

However, if your pension was valued at £1,500,000 on your death before age 75, then your beneficiary will pay Income Tax on withdrawals that exceed the Lump Sum Death Benefit Allowance. 

There are various protection arrangements in place if you had built up pension benefits under older Lifetime Allowance limits that were already above reduced Lifetime Allowance limits. 

 

Why pensions are still a brilliant account for your retirement savings even with a Lifetime Allowance 


The uncertainty since the Conservatives announced the abolishment of the Lifetime Allowance has not helped with retirement planning. 

I have heard many stories of people making large withdrawals from their pensions just because they were scared of what tax charges a new government might bring in.  

The sensational headlines from some newspapers have also not helped people remain in control of their emotions.  

Until we see the cold hard facts of any new rules, we should not be trying to second guess what to do with our retirement planning.  

We can only work with what we know, remain flexible and adapt if necessary. 

Even with the Lifetime Allowance charge, pensions have always been a fantastic way to save for your retirement. Here are three reasons why.

 

#1 – Income Tax Relief

How about a 25%, 67%, 82% or even a 150% near instant guaranteed return on your investment? 

What other investment does this? 

Well, that’s what’s potentially available via pension contributions. 

Personal pension contributions benefit from tax relief. Meaning what you pay in, the government then tops up by basic rate tax relief.  

For example, if you’re a basic rate taxpayer and contribute £8,000 to a pension, the pension provider should automatically claim basic rate tax relief and apply it to your contribution. So, the contribution becomes £10,000. This only cost you £8,000, so a 25% return.  

If you’re a higher or additional rate taxpayer, then you can claim further tax relief via your tax return.  

  • For a higher rate taxpayer, an £8,000 contribution will be topped up by £2,000 and then you can claim back a further £2,000. Total return 67%. 
  • For an additional rate taxpayer, an £8,000 contribution will be topped up by £2,000 and then you can claim back a further £2,500. Total return 82%. 
  • For someone earning £120,000, an £8,000 contribution will be topped up by £2,000 and then you can claim back a further £4,000. Total return 150%. The reason this is higher is because you reclaim some of the lost Personal Allowance. 


This compounding effecting of regular contributions also utilising pound cost averaging makes it the best tool for your retirement savings even with a potential Lifetime Allowance charge in the future. Just think of the overall net position after the charge rather than trying to avoid the charge altogether. 


#2 – Tax free investment growth

Investment gains and dividends inside a pension are not subject to Capital Gains or Income Tax. Meaning you keep more of the return you make. 

Investments outside a pension and ISA will be taxed.

 

#3 – No Inheritance Tax

Pensions are not usually subject to Inheritance Tax ensuring they are a great way to pass on wealth down the generations.  

Even if you do end up breaching the new Lump Sum Death Benefit Allowance, remember it is only the excess that is taxed and only on your beneficiaries marginal rate of Income Tax which could be as low as 20% if they are a basic rate taxpayer or nothing at all if they decide to wait until they have no other income and can utilise their Personal Allowance. 

If you were to build wealth outside of a pension or take money out of the pension it could all be subject to Inheritance Tax at 40%. 


Labour say they have no plans to bring back the Lifetime Allowance charge but that doesn’t mean they won’t change their mind. As we have already seen, there is still a version of the Lifetime Allowance in place anyway.  

Labour are not even in government yet and might not even be elected, although seems highly likely based on all the polls. 

The point is not to make any rash decisions before you understand the full facts and implications of any changes. This is where a Financial Adviser can be really useful. Pensions and the taxation of them can be complex.  

As it stands the benefits still applicable to pensions far outweigh the downside of any Lifetime Allowance issue so don’t be put off.  

Let the pension be your retirement goldmine. 


If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.  

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.