Pensions 2025: Lifetime Allowance Is Gone — So What’s the New Limit?
The LTA Is Abolished — But That Doesn’t Mean Unlimited Pensions
The 2023 Spring Budget set the stage for one of the most significant reforms to UK pensions in over a decade: the abolition of the Lifetime Allowance (LTA). From 6 April 2024, the LTA was frozen, and from 6 April 2025, it was officially removed from UK pension tax law.
While this sounds like good news — and in some ways it is — it doesn’t mean pension contributions are now unlimited or that there’s no longer a ceiling on tax-efficient withdrawals. Instead, the LTA has been replaced by two new limits on tax-free cash, and HMRC has made clear that anti-avoidance and benefit limits still apply.
For high earners, company directors, and those with large defined benefit or SIPPs, understanding these new rules is essential to avoid triggering excess tax charges — or leaving valuable tax relief unused.
What Was the Lifetime Allowance?
The Lifetime Allowance was the total amount an individual could accumulate in their pension pots without incurring a tax penalty when accessing the funds. Up to 5 April 2023, the LTA was set at £1,073,100. Exceeding this limit could result in tax charges of up to 55 percent on lump sums or 25 percent on income withdrawals.
From April 2024, the LTA charge was removed, but the allowance technically remained in place for administrative purposes. From 6 April 2025, it has now been completely abolished.
However, the government has introduced two new limits to replace it:
- The Lump Sum Allowance (LSA) — replaces the old 25% tax-free lump sum rule
- The Lump Sum and Death Benefit Allowance (LSDBA) — limits tax-free amounts on death before age 75
What Are the New Allowances in 2025/26?
While the LTA has gone, these two new limits control how much can be withdrawn tax-free:
Lump Sum Allowance (LSA)
- Capped at £268,275
- This is 25 percent of the old LTA value (£1,073,100)
- It applies to tax-free cash lump sums taken from pensions, including when crystallising benefits or accessing funds flexibly
- Any lump sum taken above this will be taxed at your marginal income tax rate
You can still take more than £268,275 out of your pension — but only £268,275 will be tax-free. The rest will be taxed as income.
If you had LTA protection (e.g. Fixed Protection 2016 or Individual Protection 2014), your tax-free cash allowance may be higher — typically 25 percent of your protected LTA.
Lump Sum and Death Benefit Allowance (LSDBA)
- Capped at £1,073,100
- This is the total amount that can be paid tax-free as a lump sum on death before age 75
- Includes tax-free lump sums paid to beneficiaries or charities
This change will particularly affect larger pension pots and those planning to use their pension as an estate planning tool. Amounts paid above the LSDBA will be taxed as income when received by beneficiaries.
What Does This Mean for Pension Planning?
While there is technically no longer a cap on how much you can hold in your pension, there are still practical and tax-based limits on what you can:
- Contribute each year
- Withdraw tax-free during your lifetime
- Leave to others tax-free on death
This means careful planning is still essential. Key areas to review include:
- How much tax-free cash you’ve already used
- Whether you have any LTA protection certificates in place
- The size of your total pension benefits, including any defined benefit schemes
- Whether your death benefit plans need to be updated to reflect the new rules
Annual Allowance Still Applies
The Annual Allowance — the amount you can contribute to your pension and receive tax relief — still applies in full. For 2025/26, this remains at:
- £60,000 per year for most individuals
- Tapered down to as low as £10,000 for those with adjusted income over £260,000
- The Money Purchase Annual Allowance (MPAA) remains at £10,000 for those who have accessed flexible benefits
These limits are particularly important for company directors, sole traders, and high earners seeking to extract profits tax-efficiently via pension contributions.
Can I Now Build a Pension Over £1 Million?
Yes — the LTA no longer restricts the size of your pot. But it does restrict how much of that pot can be withdrawn tax-free. For example:
- A SIPP worth £1.5 million can still be held and invested
- But only £268,275 of that pot can be taken tax-free as a lump sum
- The rest will be taxed as income, depending on how and when it is drawn
For individuals with generous employer contributions, large director pensions, or past public sector schemes, this is a key change. Many who previously limited pension contributions to avoid breaching the LTA may now choose to resume or increase contributions — particularly if using carry forward allowances.
Death Before 75: Still a Planning Opportunity
One of the most tax-efficient outcomes in the pension system remains dying before age 75. Pension benefits passed on before this age can be tax-free for beneficiaries, up to the LSDBA limit of £1,073,100.
However, this tax-free status applies only to:
- Uncrystallised funds
- Certain types of drawdown pots
- Amounts within the LSDBA limit
Anything paid out above the LSDBA will be taxed as income to the recipient. It’s important to review expression of wishes forms and ensure your scheme administrator understands your intentions.
Pensions remain outside of your estate for inheritance tax purposes, making them extremely valuable planning tools. But now more than ever, they must be coordinated with your overall estate and retirement strategy.
Key Facts About Pension Limits in 2025/26
The UK Lifetime Allowance was officially abolished from 6 April 2025. In its place, two new allowances apply: the Lump Sum Allowance (£268,275), which caps tax-free cash during lifetime, and the Lump Sum and Death Benefit Allowance (£1,073,100), which caps tax-free death benefits before age 75. While there is no longer a limit on how much you can hold in your pension, only a portion can be accessed or passed on tax-free. Annual and tapered contribution limits still apply.
How Merranti Accounting Can Help
Merranti Accounting works closely with independent financial advisers to help business owners, directors, and high earners build efficient retirement plans that align with tax rules.
We support our clients with:
- Pension contribution planning for directors and self-employed
- Modelling lifetime vs retirement income options
- Reviewing and tracking tax-free cash allowances
- Employer pension scheme setup for company owners
- Estate planning and pension death benefit reviews
Pension rules have changed — but so have the opportunities. With proper advice, you can now build more wealth in pensions without unnecessary tax charges.
Call: 01342 836 557
Email: contactus@merranti.com
