Pensions and tax

This section has more information about the current tax allowances that apply to pensions and retirement savings in the UK.

Please be aware this is only a high-level summary of complicated arrangements. Pension tax allowances are a personal tax issue, and it is your responsibility to establish whether you have exceeded them and - if so - to arrange payment of any tax that is due. As the cost of going over tax allowances can be significant, you should consider taking independent financial advice if you think you may be affected. Visit Getting financial advice for details of organisations that can help you with finding financial advice.

Remember

Tax treatment depends on your personal circumstances and these, and the tax rules, could change in the future.

Pension tax limits

Since 6 April 2006, the lifetime allowance has been the total amount of UK pension savings (apart from your State Pension) that you could build up while still getting the full tax benefits.

From 6 April 2024, the lifetime allowance was replaced by three allowances.

New allowances in detail . . .

To view each of these new allowances in more detail, select each of these allowances in turn, from the list below.

The lump sum allowance (LSA)

The lump sum allowance (LSA) is a cap on the amount of tax-free cash you can take from your pension savings. The entitlement to tax-free cash is not changing - it's still capped at 25% of £1,073,100 (£268,275) or higher if you have a protected lifetime allowance.

The lump sum and death benefit allowance (LSDBA)

The lump sum and death benefit allowance (LSDBA) limits the value of the pension savings you can leave your beneficiaries tax free, if you die before the age of 75.

The standard LSDBA is £1,073,100. Some people might have a higher allowance if they also had a higher protected lifetime allowance, or tax-free cash protections. If you take any tax-free cash from your pension while you are alive (including a serious ill health lump sum) then your LSDBA allowance will be reduced by the same amount. If the pension savings you leave are more than your LSDBA and your beneficiaries receive it as a lump sum, your beneficiaries will have to pay tax on the extra amount, at their marginal rate of income tax.

If you die before the age of 75, your pension can generally be paid out as a tax-free lump sum to your beneficiaries subject to the lump sum and death benefit allowance). If your beneficiaries take your pension as drawdown or as an annuity, then the LSDBA does not apply and payments will be tax-free if paid within 2 years of notification of death.

After 2 years of notification of death or if you die after age 75, your beneficiaries have the same options, but they will have to pay income tax on the benefits and the LSDBA will not apply.

The overseas transfer allowance (OTA)

The overseas transfer allowance is a limit on the value of the pension savings you can transfer abroad without having to pay a tax charge.

The overseas transfer allowance is the maximum value of pension savings you can transfer overseas tax-free (to a qualifying recognised overseas pension scheme, or QROPS) - if you go above this, you will be charged 25% tax on the excess. The standard allowance is £1,073,100, although some people may have a higher one.

If you have already taken any of your pension before 6 April 2024, your overseas transfer allowance will be reduced by the amount of your lifetime allowance already used up.

Previously, the charge applied to only some overseas transfers. Since 6 April 2024, it applies to all of them where the allowance was exceeded.

Please note:

One or more of these allowances will apply where tax-free payments are taken from your pension or you transfer your pension to an overseas scheme.

It is important to remember that the tax treatment of your pension depends on your personal circumstances and these, and the tax rules, could change in the future.

Need more information?

There is also helpful information on the Fidelity website www.retirement.fidelity.co.uk/grow-and-manage-your-pension/pension-allowances-tax-benefits/

You may also want to consider taking independent financial advice. Visit 'Getting financial advice' for details of the various organisations that can help you with finding financial advice.