Any savings over the limit are taxed at 55 per cent if the money is taken as a lump sum, or at 25 per cent plus your income tax rate if taken out gradually. The deep freeze had meant that more and more pensioners were at risk of breaking the rule. The tax charge will now be removed starting from April 2023, and abolished entirely from April 2024.

It has been frozen at £1.073m since the 2020/21 tax year, and has almost halved, in nominal terms alone, over the past 11 years. The lifetime allowance is the amount that someone can save in total for their private pension without incurring a tax charge. How big can my pension pot be before I start paying tax? Here, Telegraph Money explains how the lifetime allowance works. The lifetime allowance put a ceiling on how much you can benefit from these tax perks, now the contributions are only restricted by the annual allowance which is to be raised from £40,000 to £60,000. This method of tax is known as “EET” – it means that contributions are exempt from tax on the way in, exempt from tax when they are growing, and then taxed when taken out as income. You usually only pay tax on your pension when you start withdrawing an income from it in retirement. After all, it is the tax relief that makes pensions so attractive – any investment returns made in your fund are also free of capital gains tax and dividend tax. The allowance was previously frozen until 2028, and the Chancellor had been expected to raise it in an effort to get over 50s back to work.ĭeciding to scrap the allowance altogether, is a major win for pension savers.

However, Chancellor Jeremey Hunt committed to scrapping the lifetime allowance in his Spring Budget. The 'lifetime allowance' kicked in at £1.073m and could put a serious dampener on your retirement savings. However, pension savings were only tax-free to a point. Pensions are a fantastic way of saving because any money invested is spared income tax, meaning your returns are effectively boosted by up to 45pc immediately.

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