The Lifetime Allowance has been frozen until 2026: what does this mean for your pension?


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Over the last couple of years, successive chancellors have announced a range of measures that will likely see many UK residents pay more tax. One of the most significant of these was the confirmation that the pension Lifetime Allowance (LTA) will be frozen until April 2026. 

Currently standing at £1,073,100 in the 2022/23 tax year, the LTA is a threshold for the maximum amount you can save across all your pensions without facing a tax charge on your funds when you come to withdraw them.

Normally, the LTA is supposed to rise in line with inflation each year, so that pension savers don’t end up facing a tax charge while contributing more to their pots. It’s designed to ensure that the funds retain their spending power over time.

However, with the threshold frozen, this will see many more retirees face a charge on their retirement savings.

So, find out what the freeze means for you, and what you could do to reduce the effect of a tax bill.

The LTA will be frozen until 2026

During his first spring Budget as chancellor, now-prime minister Rishi Sunak announced that the LTA would be frozen until 2026. In October 2021, research published in Money Marketing revealed that this would see an additional 400,000 individuals face a tax charge on their retirement savings.

According to figures from AJ Bell published in Bloomberg in November 2022, the LTA would have risen to £1.3 million by 2028 had the threshold increased in line with inflation as it has done in the past. That means savers could have saved an extra £260,000 over the next five years.

Instead, as the threshold will be frozen, any sums saved into pensions that would have been protected under an increased LTA will be subject to tax.

The tax charge you will face when you come to draw funds that exceed the LTA threshold depends on how you withdraw this money. You’ll face a tax charge of:

  • 55% on lump sum withdrawals
  • 25% on withdrawals taken as income, charged on top of your marginal rate of Income Tax.

As you can see, these are rather sizeable tax bills to settle on your retirement income if you end up exceeding the LTA over the course of the next five years or so.

There’s plenty you can do to reduce the effects of the frozen LTA

With the LTA frozen, you may be concerned that this means you’ll face a tax bill on your funds – even if you stop contributing to your pot, your invested money could still generate returns that ultimately see you exceed the threshold.

Fortunately, there are a few things you could consider doing to reduce the effects of the LTA on your pension savings. Read more about these below.

Apply for LTA protection 

The first option you may want to consider is LTA protection, giving you a slightly higher LTA threshold of up to £1.25 million. 

As the government reduced the LTA in 2016 from £1.25 million to £1 million, they offer this protection for savers who this would have directly affected. So, if this describes you, that means you may be able to apply for LTA protection.

You’ll need to meet certain criteria to be eligible for LTA protection. Speak to us if you’d like to find out whether this is an option for you.

Draw your pension funds as income

The 55% tax charge on lump sums that exceed the LTA is eye-wateringly high, and so drawing money in this way is likely to be highly inefficient.

Meanwhile, the 25% tax on income is far kinder, essentially only removing any basic-rate tax relief you received on your funds. That means you’ll still be able to make the most of any investment returns your money generated.

Better yet, if you made pension contributions from income in the higher- or additional-rate tax band and received tax relief of 40% or 45% respectively, you’ll technically retain the remaining portion of this, too.

Even though you’ll still have to pay a tax charge, drawing funds that exceed the LTA as income could reduce how much you lose in tax.

Retire earlier

A simple way to avoid the danger of the LTA freeze is simply to retire sooner and start drawing on your funds.

In doing so, you could prevent your pensions from growing to the point where you’ll exceed the threshold, saving yourself a tax charge. This way, you’ll be the biggest beneficiary of your savings, rather than having to give some of it to the government instead.

Of course, you’ll need to be confident that you have sufficient funds saved to accommodate these additional years in retirement that you may not have initially planned for.

Make sure you seek advice before doing so if you’re unsure whether you can afford to choose this option.

Speak to a financial planner

Perhaps the most sensible course of action is to speak to a financial planner.

A planner can take a look at your current pension arrangements and then offer insights as how to best navigate the frozen LTA in your personal circumstances.

Crucially, your planner will do this in line with your personal goals and ambitions for the future. That way, you can be confident that you’ll still be able to live your desired lifestyle, no matter how long the threshold remains frozen for. 

Get in touch

If you’d like to find out how the LTA might affect you in your personal circumstances, please get in touch with us at Investment Sense.

Email or call 0115 933 8433 to speak to us today.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.