Lifetime Allowance Abolition: What Replaced It in 2025/26

Background — what the Lifetime Allowance was

From 2006 until April 2024 the UK had a Lifetime Allowance (LTA) — a cap on the total value of pension benefits an individual could accrue across their working life. The standard LTA peaked at £1.8m in 2010/11, was steadily cut to £1m in 2016/17, and rose with inflation to £1,073,100 by 2023/24 before being frozen.

Going over the LTA triggered the LTA charge: 55% on excess taken as a lump sum, 25% plus income tax on excess taken as income. The charge raised about £500m a year but was politically toxic — a classic example was NHS consultants refusing extra shifts because pension accrual would push them over the LTA.

The Spring Budget 2023 announced abolition; the Finance Act 2024 delivered it from 6 April 2024.

The three new limits in 2025/26

1. Lump Sum Allowance (LSA) — £268,275

This is the total tax-free cash you can take across all your pensions in your lifetime. £268,275 is exactly 25% of the abolished £1,073,100 LTA — the rounding was deliberate, preserving the same effective tax-free-cash ceiling.

Each time you crystallise pension benefits, the tax-free portion (the "Pension Commencement Lump Sum" or PCLS) reduces your remaining LSA. Once exhausted, further tax-free cash is taxed.

2. Lump Sum and Death Benefit Allowance (LSDBA) — £1,073,100

This caps all tax-free lump sums — yours and your beneficiaries'. It includes:

• Your tax-free cash (PCLS).
• Serious ill-health lump sum (pre-75 only).
• Defined-benefit lump-sum death benefits paid before age 75.
• Uncrystallised funds lump-sum death benefits (UFLSDB) paid before age 75.

Death benefits paid after age 75 are taxed at the beneficiary's marginal rate regardless — they don't use the LSDBA.

3. Overseas Transfer Allowance (OTA) — £1,073,100

Caps the total value you can transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) without a 25% overseas transfer charge.

How a typical crystallisation works in 2025/26

Sarah, age 60, has a £900,000 SIPP and decides to take £100,000 tax-free cash plus £300,000 into drawdown.

• PCLS taken: £100,000 (25% of £400,000 crystallised).
• LSA used: £100,000 of £268,275. Remaining LSA: £168,275.
• The £300,000 in drawdown is not yet taxed — only taxed as income when withdrawn.
• LSDBA used: £100,000 of £1,073,100. Remaining LSDBA: £973,100.

Three years later she crystallises another £400,000:

• Another £100,000 PCLS. LSA remaining: £68,275.
• LSDBA remaining: £873,100.

By the time her remaining £100,000 SIPP is taken, only £68,275 is tax-free; the £31,725 excess is taxed as income at her marginal rate.

Worked example — Mark, exceeded the old LTA

Mark crystallised a £1.5m SIPP in May 2025. He takes maximum tax-free cash.

• 25% of £1.5m = £375,000 — but LSA limits him to £268,275 tax-free.
• The £106,725 excess is a Pension Commencement Excess Lump Sum (PCELS), taxed at his marginal rate. If he's an additional-rate payer (45%), tax = £48,026.
• The remaining £1,125,000 stays in drawdown, taxed only as he withdraws.

Compare with the old LTA charge regime: that £426,900 excess (£1.5m − £1,073,100) would have been hit by a 25% LTA charge on income drawdown (£106,725) plus income tax on subsequent withdrawals — broadly the same outcome but applied at crystallisation rather than at withdrawal time.

The mechanism changed; the effective ceiling on tax-free cash did not.

What stays the same

• 25% tax-free cash on each crystallisation up to the LSA.
• Age 55 minimum access age (rising to 57 from 6 April 2028).
• The 25% tax-free portion of the pension commencement lump sum still applies.
• Income tax on the remaining 75% of any withdrawal.
• Annual allowance of £60,000 (or tapered down to £10,000 — see pension tapering).

What's actually new

1. Pot can grow indefinitely. No more LTA charge on excess investment growth. You can have a £3m SIPP — just only £268,275 will be tax-free.
2. Death benefits clearer. Pre-75 death: tax-free up to LSDBA. Post-75: marginal-rate income to beneficiary regardless.
3. No more LTA charges on lump sums. The infamous 55% charge is gone for good.
4. Existing protections still valid but now give a higher LSA and LSDBA, not a higher LTA.

Transitional rules and protections

If you had any of these LTA protections, they convert automatically:

You can no longer lose Fixed Protection 2016 by accruing new benefits from 6 April 2025 — Finance Act 2024 removed that disqualification.

Spring Budget 2026 — no reversal

There was speculation that Labour would restore the LTA from April 2026. In the event, the Spring Budget 2026 pensions section confirmed the LSA/LSDBA framework will remain. The standard amounts stay at £268,275 and £1,073,100 for 2025/26 and 2026/27 — frozen, not uprated.

Planning implications

1. Stop "stopping" pension contributions purely because you're near the old LTA — there's no longer a penalty for growth.
2. Consider crystallising in stages to spread tax-free cash over different years, but remember the total LSA is fixed.
3. Bypass trusts and nominated beneficiaries become more attractive for pots above £1.073m, given the LSDBA cap.
4. Review protections. A 2016 protection certificate may be worth tens of thousands more in tax-free cash.
5. Plan around age 75. Before 75, death benefits use LSDBA. After 75, beneficiary pays income tax regardless.

Try the calculator

Sources

• HMRC: Pension Tax Manual PTM170000 — Lifetime Allowance abolition
• Finance Act 2024 Schedule 9 — Abolition of the lifetime allowance
• HMRC: Tax on your private pension contributions
• HMRC: Lifetime allowance protection guidance