Pension limits: the lifetime allowance has gone

The old limit on how much you could build up in a pension before facing an extra tax charge has now been removed.

For years, pension savers had to watch a ceiling of £1,073,100, known as the lifetime allowance (LTA). Exceed it and you could face a hefty tax charge. From April 2024, that allowance was abolished altogether and replaced by new lump-sum allowances that cap the amount you can take tax-free rather than the total you can build up.

At the same time, the annual allowance, the most you can contribute to a pension in a tax year and still get tax relief, rose from £40,000 to £60,000.

Let’s look at these areas a little more closely.

The lifetime allowance

Technically, you have always been free to invest as much as you want into your pension. But under the old rules, if your pot surpassed the lifetime allowance you could face a significant tax charge of up to 55%. That limit is now gone. Since April 2024 there is no lifetime cap on the size of your pension pot; instead, separate allowances govern how much you can take out tax-free.

If you are building a substantial pension, it is worth reading up on how to make the most of your pension and the value of early pension planning.

The annual allowance

The annual allowance is the maximum amount you can contribute into a pension within a given tax year and still receive tax relief.

This did not vanish like the lifetime allowance. Instead, it rose by 50%, from £40,000 to £60,000, and £60,000 remains the standard annual allowance today. Very high earners can see this tapered down, and the Money Purchase Annual Allowance can apply once you have flexibly accessed a pension.

Any amount over the annual allowance will still result in a tax charge that broadly claws back the tax relief you received on it.

An important point: any annual allowance you did not use in the previous three tax years can often be carried forward.

Carry Forward

With carry forward, you can utilise any unused annual allowance from the three prior tax years, beginning with the most recent one. You'll need to know your yearly allowance for each of the preceding three tax years as well as the value of your pension funds for each of those years to calculate how much carry forward you have available.

There are a few rules around this and we will discuss these in another topic.

The money purchase annual allowance (MPAA)

The amount you can contribute to a pension while receiving tax relief is lowered if you have already "flexibly" withdrawn funds from a defined contribution (DC) pension - (for instance, through drawdown)

It is important to know, that this does not include taking just tax-free cash, but taxable income only.

The "money purchase annual allowance" (MPAA), was created to prevent people who had already withdrawn money from their pension recycling that money and receiving double tax relief. Practically, taking the money out and putting it right back in again. So, this limit was set to £4,000 per tax year.

Additionally, triggering the MPAA prevents you from carrying forward any unused yearly allowance from the three prior tax years. Any unused MPAA cannot be carried over either.

The MPAA was raised to £10,000 per tax year from April 2023, and £10,000 remains the limit today. If you are self-employed and building a pension, our guide to self-employed pensions is a useful next read, and pension transfers explains how to bring old pots together.

Pension rules change often and the right approach depends on your circumstances, so this is general information rather than personal advice.