HMRC's recent guidance to the pensions' lifetime allowance abolition

May 26, 2023

Retirement planning is an essential step for anyone saving for the future, and it's vital to stay up to date on changes that can affect your financial security. Recently, the HMRC issued preliminary guidance concerning abolishing the pension’s lifetime allowance, which has significant implications for retirement savings and tax liability. 

At the Spring Budget, Chancellor Hunt announced that the Government would remove the lifetime allowance charge from 6 April 2023. HMRC said the allowance complete abolishment will be from the 2024-25 tax year through a future Finance Bill. 

Abolition of the lifetime allowance means the maximum amount you can take as a pension commencement lump sum will freeze at £268,275, 25% of the current standard lifetime allowance of £1,073,100. However, members with a protected right to a higher pension commencement lump sum on 5 April 2023 will continue to access this right.

This article will explore what this change means, its financial implications, and alternative solutions you may want to consider. It will also advise financial advisors on preparing people for retirement and ensure they maximise their savings without overpaying taxes.

Overview of Pensions Lifetime Allowance

The HMRC introduced the pension’s lifetime allowance to limit the amount of money one can save in a pension over an individual's lifetime. It was initially set in 2006 at £1.5 million and has raised twice: first to £1.8 million in 2010, then to £1.25 million in 2014.

The pension’s lifetime allowance protects people from saving too much into their pension and incurring high tax charges upon retirement. However, it also means those holding more than the set limit will have to pay additional taxes on their pension savings when they retire or face penalties for exceeding the limit.

Anyone with a pension pot worth more than £1.25 million as of April 2016 will be affected by this change – whether you are currently retired or planning for retirement soon. It includes defined benefit and contribution schemes, meaning your entire pension pot has consideration when assessing whether you have exceeded the lifetime allowance.

Some potential risks are associated with exceeding the pension's lifetime allowance, including paying a 55% tax charge on any excess if you take it out as cash or an extra 25% charge if it remains inside your pension pot until death. There are also charges for transferring funds out of a scheme that exceeds the taxable value; these can range from 5-50%. So it's essential to plan and keep track of your total savings' value throughout your life.

Explanation of the Abolition of Pensions Lifetime Allowance

The recent changes to the taxation system regarding pension’s lifetime allowance have directly impacted retirement planning for many individuals. HMRC recently issued preliminary guidance regarding abolishing the pension’s lifetime allowance, providing more detail on how this will affect pension holders and their retirement savings.

The Government's decision to abolish the pension’s lifetime allowance was a response to rising levels of inequality amongst those with large pension pots and a desire to ensure fairness across all taxpayers. As such, any pension pot exceeding the £1.25 million limit will be subject to additional taxes, either when taking funds out as cash or transferring them into other investments. This change could have a significant financial impact on those whose pension pot exceeds this limit, and they should take advice from an independent financial advisor as early as possible.

For those affected by the abolition of pension’s lifetime allowance, several alternative solutions can help minimise tax liability and still enable them to save towards retirement. Individuals could consider using an Individual Savings Account (ISA) or setting up investments outside their pension portfolio. At the same time, certain types of company-sponsored schemes may also be available depending on their employment status. Individuals must review their circumstances with a qualified financial adviser before making any decisions or changes to their existing arrangements.

However, following the standard lifetime allowance checks, for a benefit crystallisation event occurring after 6 April 2023, no lifetime allowance charge will arise, and there will be no requirement to report lifetime allowance charges on the accounting for tax return (AFT).

In conclusion, you must understand its implications for retirement planning and make appropriate adjustments to safeguard against future tax liabilities. You can seek the advice of a qualified financial advisor. Accountants can gain taxation training to help their clients get the most out of savings and build a secure financial future.

Impact on Retirement Planning

The recent shift in the pension’s lifetime allowance has had a far-reaching effect on retirement planning for those already receiving or looking to receive income from their pension savings. Individuals must be mindful of the new upper limit of £1.25 million and ensure that any current or future investments are structured to avoid any unexpected tax liabilities. It could involve exploring different investment vehicles - such as ISAs - alongside consulting with a financial advisor, who can offer tailored advice on how best to protect yourself against future taxes. 

Furthermore, it may also require rethinking one's approach towards retirement income and strategy, adjusting allocations and considering opting out of employer schemes if necessary. Ultimately, it is crucial to remain aware of this significant change and seek expert assistance to ensure your retirement plans are still on track.

Alternatives to Consider

In light of the recent pension lifetime allowance reduction, individuals must consider alternative strategies to ensure they can still maximise their retirement savings. One such option is self-directed pensions, which give them more control over their investments than relying on a fund manager or employer scheme. Deferring benefits until age 70 or above also reduces tax liabilities and provides a more considerable sum while taking out funds.

Reviewing current pension plans and investigating other tax strategies, such as ISAs or different investment portfolios, to protect against future charges is essential. Ultimately, seeking professional financial advice from a qualified advisor is necessary for individuals to understand how best to maximise returns while minimising taxes on any excess funds beyond the pension's lifetime allowance limit.

Guidance from Financial Advisors

Retirement planning can be daunting, and seeking professional advice from financial advisors is often the best way to ensure your plan is successful. Financial experts can provide an unbiased and informed view of pension options and assess your financial situation before developing a retirement plan.

Finding the right advisor for you is critical – seek out someone with experience in retirement planning and a good reputation for providing sound advice tailored to your needs. They should also have access to the latest information on pension changes and other retirement savings options to avoid any changes that may affect them.

Advisors can guide investment options, such as stocks, bonds, mutual funds, ETFs and annuities. They can also suggest strategies to maximise retirement savings while minimising tax liabilities. For instance, advisors recommend using Individual Retirement Accounts (IRAs) or Roth IRAs instead of traditional 401(k)s to reduce taxable income during retirement.

In addition, advisors can help with estate planning by discussing how best to pass down assets to beneficiaries upon death. Finally, they can answer any retirement planning questions or related topics such as Social Security benefits or Medicare enrolment.

Overall, seeking advice from a qualified financial expert is essential to any successful retirement plan. While it's important to consider your personal goals when making decisions about your future finances, having an advisor guide you through the process will help ensure that these decisions align with both short-term and long-term objectives.


The shift in the pension’s lifetime allowance has many financial implications for those approaching or who have already reached retirement age. Thorough understanding and planning of these changes are essential to protect against future tax liabilities. 

Seeking advice from a qualified financial advisor can help individuals make well-informed decisions about their retirement plans, such as setting up investments outside of their pension portfolios, using ISAs, deferring taking benefits until age 70 or above, rethinking one's approach to retirement income and strategy, adjusting allocations, and potentially opting out of employer schemes.

Ultimately, it is crucial to stay aware of the change in the pension’s lifetime allowance and keep track of your total savings' value throughout your life. With careful planning and expert guidance from a professional financial advisor, you can maximise your retirement savings while minimising potential tax liabilities.