Lifetime allowance abolished: essential Q&A

Pensions and retirement
Views & insights

Find out what the abolition of the pension lifetime allowance could mean for you in our essential Q&A guide

Share

17 March 2023 | 3 minute read

The lifetime allowance may have been abolished, removing one specific area of pension pain, but that doesn’t mean pension planning overall has become more straightforward.

   


 
     
Download: A guide to saving for retirement

Jam-packed with essential information on how to enjoy a more comfortable life after work.

Download now


     
     

 
The changes to pension rules in the 2023 spring budget have thrown up a series of issues which might affect your pension planning. Here, we answer some of the questions you might have about what to do next. 

1) Should I restart my pension contributions?

If you paused pension contributions because you were concerned you might breach the lifetime allowance of £1,073,100, you may decide you want to make further tax-efficient additions to your pot. The existing pension annual allowance of £40,000 for 2022/23 is still available until 5 April 2023. You might also be able to carry forward unused annual allowances from the previous three tax years, potentially enabling you to contribute up to £160,000 (including tax relief) to your pension pot by 5 April.

The increase in the annual allowance from £40,000 to £60,000 for the tax year 2023/24 means that in future years you could be putting more away for your retirement tax efficiently.

This could be particularly beneficial for those in higher income tax brackets. For example, someone earning £160,000 a year could make a £60,000 gross pension contribution, resulting in their adjusted net income falling to £100,000. Doing this could enable them to avoid the additional-rate income tax rate and it would also reinstate their tax-free personal allowance (which is tapered once adjusted net income exceeds £100,000).

2) What should I do if I already have fixed protection?

If you have fixed protection in place, whether 2012, 2014 or 2016, which maintained your lifetime allowance at a particular level, you may wonder if it’s worth starting to make contributions again. However, this isn’t a straightforward decision. If you were to make further contributions in the 2022/23 tax year, you would lose your fixed protection, which entitles you to withdraw a tax-free lump sum of 25% of the original level of protection. That will be higher than the amount of tax-free cash you can draw from 6 April, when it will be capped at £268,275. In the 2023/24 tax year, you will be able to make further contributions without losing your entitlement to the higher value tax-free lump sum, so long as your fixed protection was in place before 15 March 2023.

3) Can I still take my pension tax-free lump sum?

The pension tax-free lump sum has been capped at £268,275, so even though it is now possible to build a larger pot without incurring a lifetime allowance tax charge, the tax-free lump sum will not grow with it. This may affect the timing of your decision to start drawing money from (or ‘crystallise’) your pension.

4) Should I reconsider my inheritance tax plans?

Pensions usually sit outside your estate and so are not subject to inheritance tax (IHT) when you die. Depending on your circumstances, building up your pension pot could play a role in your estate planning strategy. This is a complicated area so it is worth discussing with an expert.

5) Should I be thinking beyond pensions?

Although the abolition of the lifetime allowance makes pensions more attractive, there may be other investment approaches that better suit your needs. ISAs can play an important role in retirement planning, but understanding how venture capital trusts (VCTs) or Enterprise Investment Schemes (EISs) operate may add a different dimension to your decision-making.

Next steps

Understanding how the abolition of the lifetime allowance will affect you isn’t easy, and that’s where getting some smart advice can help. A financial adviser can help you clarify your situation, run through all your options, and explain how to manage potential tax liabilities. By getting financial advice that is tailored to your individual circumstances, you’ll feel more confident that you’re making the right decisions for you.


The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.


   


 
     
Get financial planning tips straight to your inbox

Sign up to our newsletter for expert insights on investing for the future, saving for retirement, passing on assets to the next generation, and much more.

Subscribe


     
     

Are your retirement plans on track?

request-a-callback-cta

We’ll guide you through your options, show how much you need to save, and build a plan that helps you realise your ambitions.

Retirement planning

More on this topic

You may be interested in

How to invest a £500k inheritance in your 60s

Inheritance and estate planning 3 min read
How to invest a £500k inheritance in your 60s

Markets strong as S&P 500 passes 5,000 mark

Market news 5 min read
Markets strong as S&P 500 passes 5,000 mark

Understanding your pension annual allowance

Pensions and retirement 3 min read
Understanding your pension annual allowance

The value of investments and any income from them can fall and you may get back less than you invested.