On 15 March 2023 the Government announced measures that remove the Lifetime Allowance tax charge and freeze the limit on the pension commencement lump sum (PCLS) at £268,2751. The announcement is effective from 6 April 20231. The frozen figure represents 25% of the Lifetime Allowance in effect at that date, which was £1,073,1001.
The freeze applies across all of a person's pension arrangements, so lump sums taken from all pensions combined may never be more than £268,2751. Future legislation is expected to remove the Lifetime Allowance altogether but retain the limit on the PCLS1.
The PCLS is the tax-free cash that can be taken when a pension starts1. Taking it means giving up some monthly income in exchange, resulting in a reduced monthly income, and this applies whether the person receives a final salary pension or a money purchase pension1. The maximum lump sum is also restricted by a separate calculation set out in tax legislation, which is currently very roughly five times annual pension income at age 65, assuming no additional voluntary contribution accounts1.
"On 15th March 2023, the Government announced measures that remove the Lifetime Allowance tax charge and freeze the limit on the pension commencement lump sum (PCLS) at £268,275, being 25% of the LTA in effect at that date (£1,073,100). This announcement is effective from 6th April 2023."
| Item | Detail |
|---|---|
| PCLS limit | £268,275 across all pension arrangements1 |
| Lifetime Allowance at the date of the announcement | £1,073,1001 |
| Effective date | 6 April 20231 |
| Lifetime Allowance tax charge | Removed1 |
Why it matters for households
The limit on tax-free cash from a pension is now a fixed figure rather than one that moves with the Lifetime Allowance, so the amount of tax-free cash available from all pensions combined is capped at £268,2751. Anyone whose total pension savings would previously have produced a larger tax-free lump sum is affected by the freeze, and the cap applies across every arrangement rather than to each scheme separately1.
The removal of the Lifetime Allowance tax charge means the charge that previously applied when pension savings exceeded the Lifetime Allowance no longer applies1. The Lifetime Allowance itself is expected to be removed altogether by future legislation, while the PCLS limit is expected to remain1.
Monthly pension income remains taxable under the same rules as salary, whether or not a lump sum is taken1. Taking a lump sum reduces monthly income, and money held in additional voluntary contribution accounts can be used towards the lump sum to reduce the size of that reduction1.
What happens next
Future legislation is expected to remove the Lifetime Allowance altogether but retain the limit on the PCLS1. No date for that legislation has been reported1.
Sources1 cited
- Pensions and Lump Sums - Which? which.co.uk
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