Lifetime Allowance on Pensions: What to Do in 2026 With the Old Limits Gone

After years of tiptoeing around pension limits, the lifetime allowance on pensions—once the ultimate ceiling on tax-free growth—has finally been scrapped. From April 2025, HMRC’s new rules changed how your pension benefits, lump sums, and tax-free cash are calculated across all registered pension schemes.

It’s a big shift. The removal of the lifetime allowance means there’s no longer a hard cap on how large your pension pot can grow before the taxman takes a bite—but that doesn’t mean it’s a free-for-all. New limits now apply to lump sums, income tax on withdrawals, and how much you can draw tax-free in retirement.

If you’ve been saving diligently (or just nervously eyeing your pension statements), 2026 is the year to pay attention. The rules may have changed—but the goal remains the same: keeping as much of your pension in your pocket as possible.

What was the lifetime allowance on pensions?

Before 2025, the lifetime allowance (LTA) was HMRC’s way of capping how much your pension savings could grow before facing extra tax charges. It applied across all your pension arrangements—personal, workplace, and self-invested pensions (SIPPs)—and affected anyone whose total pot exceeded the limit when taking benefits.

Here’s how it worked in practice:

• The standard lifetime allowance was £1,073,100 for most people (though some had lifetime allowance protection from earlier years when the limit was higher).
• You’d trigger the LTA charge when taking benefits such as drawdown, buying an annuity, or withdrawing your pension commencement lump sum (your 25% tax-free portion).
• If your total benefits went above the threshold, the excess was taxed at your marginal income tax rate—previously up to 55% on lump sums.

The allowance also affected certain death benefits, including lump sum death benefits and dependant’s pensions, both of which were tested against the LTA before the recent changes.

While the system aimed to cap tax-free pension growth, it often punished long-term savers, public sector workers, and anyone who’d invested consistently over time. The 2025 reforms aimed to simplify all that—with new allowances replacing the old limits and removing the shock of a sudden lifetime charge.

📌 Pro Tip: If you previously applied for LTA protection, don’t cancel it without checking first. Some protections still offer valuable tax-free cash advantages, even under the new rules. It’s worth confirming with your financial adviser before you make any changes.

Has the lifetime allowance been abolished?

Yes — the lifetime allowance (LTA) is officially gone. After being frozen for years at £1,073,100, the allowance was scrapped altogether following the Spring Budget reforms. As of April 2025, HM Revenue & Customs has removed the LTA from the UK pension tax framework, replacing it with new limits that focus on lump sums rather than total pension value.

Here’s what’s changed:

• The lifetime allowance charge—previously up to 55%—has been abolished.
• Instead, new rules cap how much you can take tax-free through the Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA).
• The overall size of your pension lifetime savings no longer triggers a penalty, though withdrawals above the new lump-sum limits are taxed at your normal income tax rate.

If you held primary protection, enhanced protection, or individual protection 2016, these are still recognised under the new system. However, the benefits mainly relate to your tax-free cash entitlement, not to avoiding tax on total pension value.

Updated HMRC guidance on gov.uk confirms that all registered pension schemes must now apply the new allowances in place of the abolished LTA. In other words, the headline cap may be gone—but the paperwork isn’t.

📌 Pro Tip: Even without the lifetime allowance charge, don’t assume “limitless” pensions. The new lump sum allowances can still trip up higher earners or early retirees—so a quick check with your financial adviser is time well spent.

New Rules: Lump Sum Allowance (LSA), Death Benefit Allowance (LSDBA), and pension withdrawals

With the lifetime allowance gone, two new limits now take its place: the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA). Together, these control how much tax-free cash you can take from your pension benefits—and how much your loved ones can receive tax-free if you die.

Here’s how it works:

• The Lump Sum Allowance (LSA) is set at £268,275, equal to 25% of the former lifetime allowance. This is the maximum tax-free pension commencement lump sum you can take across all your pensions.
• The Lump Sum and Death Benefit Allowance (LSDBA) is £1,073,100, mirroring the old lifetime allowance. It limits how much can be paid out tax-free as lump sums when you die.

Anything above these limits is no longer hit with a punitive lifetime allowance charge—but it will be taxed at your marginal rate of income tax when withdrawn. In short, HM Revenue & Customs has swapped complexity for consistency: no more one-off 55% shocks, but regular income tax rules now apply.

Your pension provider will handle valuations under the new system, so accurate record-keeping is crucial. Providers will use historic data to track how much of your LSA and LSDBA you’ve used over time.

📌 Pro Tip: Think of these new allowances as “soft caps.” You won’t lose half your pot overnight for crossing them—but you could pay more income tax than necessary. A quick check-in with your pension provider or adviser before making large pension withdrawals can save you a nasty surprise later.

How the end of the LTA impacts your pension pot

With the lifetime allowance officially gone, pension savers finally have room to grow their pots without fear of triggering a hefty tax charge. You can now build as large an annual pension as your income and allowances allow—but that doesn’t mean HMRC has stopped paying attention.

While the old pension lifetime allowance no longer limits your total savings, HM Revenue & Customs now tracks your tax-free cash withdrawals instead. Every time you take a lump sum, part of your new Lump Sum Allowance (LSA) is used up, and once it’s gone, any extra withdrawals are taxed at your normal rate of income tax.

If your pension pot exceeded the LTA before 2025, your protection still matters:

• Primary protection, enhanced protection, and fixed protection 2016 still apply, helping preserve higher tax-free cash rights.
• Individual protection 2016 also remains valid, pegging your benefits to the value they held when the old lifetime allowance rules were in force.

For those with overseas pensions or transfers, the Overseas Transfer Allowance (OTA) still exists. This mirrors the former LTA threshold and limits how much can be moved abroad without an additional overseas transfer charge.

In short: you can now grow your pension pot without a hard ceiling—but the tax-free element still has boundaries. Understanding where those limits lie could be the difference between a comfortable retirement and an unexpected amount of tax on your withdrawals.

📌 Pro Tip: If your pension’s already well above £1 million, don’t assume you’re automatically “safe” under the new system. The old protections still offer valuable advantages—especially around tax-free cash—so speak to your provider before you touch a penny.

Taking a tax-free lump sum: What’s changed in 2025?

You can still take 25% of your pension tax-free—but under the new rules, it’s no longer a simple percentage of your pot. From 2025, HM Revenue and Customs has introduced the Lump Sum Allowance (LSA), which caps your total tax-free cash at £268,275 across all pensions, no matter how many schemes you hold.

That means whether your pension is defined contribution or defined benefit, you now have a single lifetime limit on how much can be taken tax-free. Any withdrawals beyond that amount are treated as income and taxed at your marginal rate.

Here’s how it plays out:

• If you’re in drawdown, you can still take up to your remaining LSA tax-free, then pay income tax on anything above it.
• If you buy an annuity, the same principle applies—the first slice within your LSA remains tax-free.
• The Lump Sum and Death Benefit Allowance (LSDBA) now governs what your beneficiaries—including civil partners and dependants—can receive tax-free if you die before age 75. Anything beyond that allowance is taxed in line with normal income rules.

For anyone with pensions across multiple schemes—or an overseas pension scheme—keeping accurate records of the total value of lump sums you’ve already taken is essential. Each withdrawal eats into your remaining LSA, and your pension provider will need to report this to HMRC.

📌 Pro Tip: Don’t assume “25% tax-free” still means 25% of whatever you’ve built up—it doesn’t. If your pot keeps growing, your tax-free limit doesn’t grow with it. Knowing your remaining LSA can make a huge difference in deciding when (and how much) to withdraw.

Annual allowance, pension contributions, and income tax

Even though the lifetime allowance has been scrapped, the annual allowance still limits how much you can contribute to your pension each year while enjoying income tax relief. For 2025/26, the allowance remains £60,000 or 100% of your relevant UK earnings—whichever is lower.

Here’s what to know:

• The allowance covers all contributions, including those from your employer, across every registered pension scheme.
• If your adjusted income exceeds £260,000, the tapered annual allowance can reduce that limit to as little as £10,000.
• Exceeding your allowance triggers a pension tax charge, clawing back excess relief claimed.
• You can use carry forward rules to apply unused allowance from the previous three tax years.

Your pension contributions can also influence your wider finances. Increasing contributions can lower your taxable income, reduce your rate of income tax, and even protect future state pension entitlement by keeping your National Insurance record strong.

📌 Pro Tip: If you’re hovering near the higher rate threshold, topping up your pension before 5 April can nudge your income into a lower tax band—cutting your tax bill while boosting your retirement fund.

Special cases: Divorce, death benefits, ill health, and complex scenarios

The end of the lifetime allowance hasn’t simplified everything—especially when it comes to life’s curveballs like divorce, ill health, or what happens to your pension when you die. These situations now fall under the new Lump Sum and Death Benefit Allowance (LSDBA) and a fresh set of HMRC rules for dependants and beneficiaries.

Here’s how the new system handles special cases:

• Divorce or separation: Pension savings can still be split as part of a pension sharing order. The new allowances apply to each person’s share, so your Lump Sum Allowance (LSA) and LSDBA are calculated individually.
• Ill health: If you retire early due to serious or terminal illness, you may be entitled to take your pension benefits tax-free, depending on your medical evidence and provider’s scheme rules.
• Death benefits: When you die, any tax-free lump sums paid to your dependants or beneficiaries count toward your LSDBA (set at £1,073,100). Anything above that is taxed at the recipient’s marginal rate of income tax.

The LSDBA now governs how much can be paid out tax-free to civil partners, dependants, or nominated beneficiaries. Your pension provider will report payments to HMRC to track how much of this allowance has been used.

📌 Pro Tip: If you haven’t updated your beneficiary nomination since the rule change, now’s the time. A quick form update ensures the right person receives your death benefits—and that they make the most of the available tax-free cash.

Maximising your pension: Planning tips for 2026

With the lifetime allowance officially gone, 2026 is the year to rethink how you manage and grow your pension. The rules may have simplified on paper, but the new limits on tax-free cash and death benefits make planning more important than ever.

Start with the basics:

• Review your pension provider’s latest updates and confirm how they’re applying the new LSA and LSDBA rules.
• Check how much tax-free cash you’ve already used—and what remains under your new allowances.
• If you hold multiple pension pots or older protections, review your paperwork and confirm whether your financial adviser needs to update your records.

Good record-keeping is your best protection. Track every withdrawal, keep your pension statements, and note any historic LTA or lump sum information your provider carries forward.

It’s also smart to get professional help if:

• You have a high-value scheme or multiple pensions.
• You’re unsure whether your old protections still apply.
• You’re planning to take large withdrawals or transfer abroad.

📌 Pro Tip: Before the tax year ends, log into your HMRC account or visit gov.uk for the latest pension guidance. One hour of prep before April could mean thousands saved in unnecessary tax—and a much calmer start to retirement planning.

Ready to rethink your pension strategy?

With the lifetime allowance gone, pensions have entered a new era—one that gives you more freedom, but also more responsibility to plan wisely. The best way to protect your future self is to stay informed now: understand your new lump sum allowances, keep your records tidy, and make sure your tax-free cash is working as hard as your investments.

If you’re unsure how the new rules affect your pension—or want to double-check that your financial planning still stacks up—it’s worth booking a quick free chat with an independent financial adviser through Unbiased. A short conversation today can help you avoid expensive surprises later and make the most of a once-in-a-generation rule change.

Because when it comes to retirement, the best plan isn’t just about saving more—it’s about keeping more.