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Last Updated on 31st December 2024

Regular pension reviews are an important way to ensure you’re on track to hit your retirement goals, with sufficient wealth and income to achieve your lifestyle aspirations. Identifying a potential shortfall early can be invaluable in adjusting your investments to ensure your retirement is everything you wish for.

With that in mind, it’s important to be aware of the allowances that replaced the UK Lifetime Allowance (LTA) when it was abolished at the start of the 2024/25 tax year – and the potential ramifications if this tax threshold is reintroduced in the future.

In the past, the LTA meant that you would be liable for a 25% pension tax on savings over the £1.073 million threshold, with lump-sum withdrawals taxed at up to 55%. The removal of the LTA was welcomed by many – but there remain other allowances to be conscious of.

Knowing  what your pensions are worth and the options available if you forecast a shortfall or sizeable tax liability is key to avoiding unnecessary tax exposure and taking steps to supplement or stabilise your retirement assets.

Changes to the UK Lifetime Allowance Explained

As we’ve stated, the LTA set a limit on the maximum amount of retirement savings you could accrue before becoming subject to additional taxation. Now, there is no such cap on your total pension wealth, but there are limits on the tax-free withdrawals you can make.

The new allowances include the Individual Lump Sum Allowance (LSA) and the Individual Lump Sum and Death Benefit Allowance (LSDBA), alongside reforms to the Overseas Transfer Tax, which we’ll explain shortly.

Understanding New Pension Allowances Replacing the LTA

Each new allowance continues to refer to the same threshold used within the LTA – fixed at £1.073 million. When the LTA was scrapped, the government introduced these allowances to limit the amount of tax-free pension savings individuals could draw down.

The LSA has a £268,275 limit, which is the maximum you can withdraw tax-free, based on 25% of the old LTA. In contrast, the LSDBA is set at £1.073 million and places an overall cap on the amount of tax-free lump sums you can withdraw, including ill-health benefits and lump sums, before the age of 75.

Both allowances may be mitigated if you hold some form of LTA protection, but otherwise, lump sums drawn from a pension above the thresholds will be exposed to tax at the marginal rates.

Pension-related allowances apply to most products, including the following but excluding the State Pension:

Whether you have already started drawing your pension or are keen to ensure you have sufficient retirement income for the future, calculating the value of your retirement savings, and the associated tax deductions is essential.

How to Assess the Future Value of Your Pension

Knowing the expected value of your pension may not be as simple as it sounds. Pension benefits may be subject to fluctuating returns or interest rates, market volatility, or depend on the age at which you decide to start drawing them.

To assess your pension scheme fund, you can work through the steps below or consult a Chase Buchanan adviser who can help construct a bespoke pension forecast:

  • Collate details of all pension schemes, savings, and investments in your portfolio.
  • Request an estimate from every provider to predict the valuation.
  • Access your State Pension statement to factor this income into your assessment.

The correct approach depends on the nature of your pension products. For example, a defined benefit scheme or defined contribution plan may have very different effective future values.

It’s also important to include savings and investment accounts in addition to your pension since they will also generate an income. That includes rental properties, investment products and cash savings.

Without updated forecasts, it’s impossible to know if you should continue making contributions or whether you’re likely to reach either of the thresholds above and need an alternative strategy to protect your financial security.

How to Manage Higher-Value Pension Benefits and Additional Tax Exposure

Confusion about how and when the new allowances may apply is far from rare, and the good news is that you are unlikely to encounter unexpected tax charges until you reach a crystallisation event – which could be when you:

  • Begin drawing your pension income
  • Request a lump-sum payment
  • Purchase an annuity
  • Reach age 75

Pensions become subject to tax calculations and assessments at any of these events or if an individual passes away. Therefore, you need to know the anticipated value before drawing on your fund.

We’d also strongly recommend seeking professional guidance if you are unsure about the tax associated with your pension or are considering transferring your pension overseas as part of your plans to relocate.

There are several potential options, perhaps to cease contributions, take your pension benefits sooner, or redirect your payments to alternative investment products.

Alongside the removal of the LTA and the introduction of the new replacement allowances, the government has extended the scope of the Overseas Transfer Tax (OTC). In the past, expatriates could strategically plan pension transfers to avoid additional tax, but now the 25% charge applies to most pension transfers, including those to a Recognised Overseas Pension Scheme (ROPS).

HMRC Lifetime Allowance Protection

Some pension holders may be eligible to apply to HMRC for protection against lump-sum and death benefit allowances.

Much may depend on timings, with individual protection that can safeguard your pension savings value as of 5th April 2016, when the LTA was lowered to £1 million.

It’s wise to seek professional guidance if you think you may be eligible and to ensure you apply for the correct type of pension allowance protection.

Tax-Efficient Pension Transfers

We’ve mentioned that reforms to the taxes applicable following a pension transfer to a Recognised Overseas Pension Schemes (ROPS) might make this option less appealing or beneficial from a tax perspective.

However, if your pension is forecast to grow substantially in the coming years, it may be worth noting that after a transfer, you are exempt from further penalties. Following a pension transfer, the flexibility and tax efficiencies on offer may compensate for the tax liability incurred, but as always, professional wealth management advice is necessary.

SIPPs Pension Transfers

Another way to retain your pension assets is to look into Self-Invested Personal Pensions (SIPPs). These schemes do not involve a change of jurisdiction, so you won’t need to pay an Overseas Transfer Charge, but the other tax allowance thresholds will apply.

Choosing the Best Solution to Avoid Unnecessary Pension Taxation

There is no one ‘right’ way to manage your pension assets since the strategies or options we suggest may depend on the following factors, among others:

  • Whether you are already taking your pension or not.
  • How much you currently have invested in your retirement.
  • When you plan to retire, if not already.
  • How quickly you want to access pension benefits.
  • Where you live and where you plan to retire.
  • What sort of pension products and other assets you own.

We’ve looked at some possible ways forward, but the best solutions could involve making alternative investments towards your retirement that fall outside the scope of pension taxation and with comparable rates of return, provided these are consistent with your objectives and expectations.

Contact the nearest Chase Buchanan team to discuss the most suitable options for you and to get help with making informed decisions about managing your pension tax exposure.

*Updated December 2024