The pension lifetime allowance was a cap on the total value of tax-advantaged pension savings you could build up before an extra tax charge applied. It stood at £1,073,100 in its final years and was formally abolished on 6 April 2024. Two new limits took its place: a Lump Sum Allowance of £268,275 covering tax-free cash taken during your lifetime, and a Lump Sum and Death Benefit Allowance of £1,073,100 covering the combined total of tax-free lump sums paid to you and to your beneficiaries after death.1Legislation.gov.uk. Finance Act 2024 Schedule 9
What the Lifetime Allowance Capped
The allowance set a ceiling on the total value of pension benefits you could accumulate across every scheme you belonged to, excluding the state pension. It covered defined contribution pots, defined benefit entitlements, and any combination of the two. Stay below the limit and your retirement income and lump sums were taxed normally. Go above it and the excess faced a separate charge on top of ordinary income tax.2HM Treasury / HM Revenue & Customs. Finance Bill Explanatory Note – Pensions: Lifetime Allowance and Annual Allowance
The measurement wasn’t continuous. It happened at specific trigger points: when you first drew pension income, when you reached age 75, or when you died with uncrystallised funds. At each trigger, your provider calculated how much of your allowance you had used and reported any excess to HMRC.
The limit itself moved during the allowance’s 18-year life. It launched at £1.5 million in April 2006, rose to £1.8 million by 2010/11, then was cut in stages back down to £1 million by 2016/17 before settling at £1,073,100, where it was frozen from 2020/21 until abolition.3Legislation.gov.uk. Finance Act 2004 Section 218 – Individual’s Lifetime Allowance and Standard Lifetime Allowance
How Pension Values Were Measured
Defined contribution pensions were easy to value. The figure that counted against your allowance was the market value of the pot at the point you accessed it, including contributions, employer payments, and investment growth.
Defined benefit pensions needed a formula because they promise an income rather than holding a pot. HMRC’s standard method multiplied your promised annual pension by 20 to produce a capital value. Any separate tax-free lump sum paid on top was then added. A pension paying £40,000 a year therefore used £800,000 of your allowance, and adding a £100,000 lump sum from the same scheme brought the total to £900,000.
Where you held both types, the values were added. Someone with a defined benefit pension valued at £600,000 and a defined contribution pot worth £500,000 had used £1,100,000, breaching the £1,073,100 limit by about £27,000.
The Tax Charges That Used to Apply
Before abolition, an excess above the lifetime allowance was taxed one of two ways depending on how you took it. Cash withdrawn in a lump sum above the limit faced a 55% charge. Amounts kept in the pension and drawn as income faced a 25% surcharge, with the remainder then also subject to income tax at your marginal rate. Taking the excess as income often meant a combined effective rate above 50%.
The charge was effectively removed from 6 April 2023, a year before the allowance itself was formally scrapped. The Finance (No. 2) Act 2023 prevented any new charge from arising, and excess amounts became taxable at the individual’s marginal income tax rate instead.4GOV.UK. Abolition of the Lifetime Allowance (LTA)
What Replaced It From April 2024
The Finance Act 2024 abolished the lifetime allowance from 6 April 2024 and introduced two new caps focused on tax-free payments rather than the overall size of your pension.4GOV.UK. Abolition of the Lifetime Allowance (LTA) The shift is fundamental. Under the old rules the whole pension was measured. Under the new rules you can accumulate as much pension wealth as you like; only the tax-free portion is limited.
Lump Sum Allowance
The Lump Sum Allowance (LSA) caps tax-free cash you take during your lifetime at £268,275.1Legislation.gov.uk. Finance Act 2024 Schedule 9 It covers pension commencement lump sums (the standard 25% tax-free cash) and other tax-free lump sums, but not death benefits. You can still take up to 25% of each individual pot tax-free, but the running total across all your pensions cannot exceed £268,275. Anything above that is taxed as income.5GOV.UK. Taking Higher Tax-Free Lump Sums With Protected Allowances
Lump Sum and Death Benefit Allowance
The Lump Sum and Death Benefit Allowance (LSDBA) is the broader cap, set at £1,073,100.1Legislation.gov.uk. Finance Act 2024 Schedule 9 It covers the combined total of tax-free lump sums taken in your lifetime plus any tax-free lump sum death benefits paid to your beneficiaries. The LSA sits inside the LSDBA, so every pound of tax-free cash you take also uses up part of your LSDBA.
If you die before age 75 with uncrystallised funds, death benefit lump sums can be paid tax-free up to your remaining LSDBA, with anything above that taxed at the beneficiary’s marginal rate. If you die at 75 or older, death benefit lump sums are taxed at the beneficiary’s marginal rate regardless of the LSDBA.6HM Revenue & Customs. Lifetime Allowance (LTA) Abolition – Frequently Asked Questions
If You Hold an Old Lifetime Allowance Protection
Protections granted when the lifetime allowance was cut still carry real value. Fixed Protection 2016 locked a personal allowance of £1.25 million, on condition you stopped all further pension accrual after 5 April 2016; any contribution or benefit accrual after that date, including automatic enrolment contributions you forgot to opt out of, invalidated it.7NHS Pensions. Fixed Protection 2016 Factsheet Individual Protection 2016 was more flexible: if your pensions were worth more than £1 million on 5 April 2016, you got a personal allowance equal to that value, capped at £1.25 million, and could keep contributing.
Both translate into higher LSA and LSDBA figures under the new regime. Someone with a protected lifetime allowance of £1.25 million now has an LSDBA of £1.25 million and an LSA of £312,500, following the same 25% relationship that produces the standard £268,275 from £1,073,100.5GOV.UK. Taking Higher Tax-Free Lump Sums With Protected Allowances The protections did not fall away with the allowance itself.
The Annual Allowance Is Separate and Still in Force
The lifetime allowance is often confused with the annual allowance, but they answer different questions. The annual allowance limits how much can be paid into your pensions in a single tax year while still attracting tax relief. For 2026/27 the standard annual allowance is £60,000, or 100% of your earnings if lower, with unused allowance from the previous three tax years available to carry forward if you were a scheme member during those years.8GOV.UK. Pension Schemes Rates Reduced versions apply if you have already drawn taxable income flexibly from a defined contribution pot, or if you are a high earner caught by the taper. The annual allowance was not affected by the 2024 abolition and applies to every pension saver.