The lifetime allowance charge on the size of a pension pot is gone. What remains is a cap on the tax-free lump sums you can take — a different limit doing a different job.
For years the lifetime allowance capped the total value a pension could reach before a tax charge applied, and it shaped the decisions of every high earner who came near it. It no longer exists. What replaced it is narrower and frequently misunderstood: a limit on how much can be taken out of pensions tax free, rather than on how much the pensions can be worth.
The practical effect is that there is now no penalty for a large pot as such. A pension can grow to any size. The limit bites only on the tax-free element you can extract from it, capped at £268,275 across all your pensions.
What the Cap Does and Does Not Cover
| Item | Inside the cap? |
|---|---|
| Tax-free cash taken alongside drawdown | Yes |
| The tax-free part of an uncrystallised lump sum | Yes |
| The taxable 75% you draw as income | No — taxed as income when drawn |
| Growth on the pot after it is crystallised | No limit at all |
| The total size of your pension savings | No limit at all |
The 25% rule still applies scheme by scheme. Most people can take a quarter of each pension tax free, and the allowance is a ceiling across all of them. Someone with pensions totalling well over a million pounds reaches the ceiling before they reach 25% of the whole, and the balance above it is taxable income when drawn.
Protections Carried Over
People who registered one of the lifetime allowance protections under the old regime may have a higher personal figure than the standard cap. Those protections carried forward into the new rules, and where one is held it is genuinely valuable — often worth tens of thousands in tax. If you registered a protection at any point, find the certificate before making any decision about taking benefits, and tell your provider it exists, because schemes do not know unless told.
What This Changes About Planning
- Continuing to contribute is no longer penalised by pot size. Under the old regime, high earners near the lifetime allowance often stopped contributing. That reason has gone; the £60,000 annual allowance and its taper remain the live constraints, as our taper guide explains.
- The tax-free element is now the scarce resource, not the pot. That argues for using it deliberately rather than by default.
- Beyond the cap, a pension is a tax-deferral vehicle: relief in, growth free of income tax and capital gains tax, taxed on the way out. That is still a good deal, particularly for anyone whose rate in retirement is lower than now.
- Timing matters more than it did. Taking benefits in stages spreads taxable income across years and rates.
Do Not Take It Just Because It Is There
The most common error is treating tax-free cash as something to be extracted at the first opportunity. Money inside a pension grows without income tax or capital gains tax; the same money in a bank account does not. Unless there is a use for it — a mortgage to clear, a genuine spending need — taking a large lump sum early converts a tax-privileged asset into a taxable one, and can also start the clock on the £10,000 money purchase annual allowance if taxable income is drawn alongside it.
Anyone Planning to Live Abroad Should Stop Here
The UK exemption on the tax-free lump sum is a UK rule. Take the money while resident in another country and that country's law decides how it is treated, and many treat the whole payment as ordinary pension income. This is the single largest avoidable mistake made by people retiring overseas — our guide to lump sums as a non-resident sets out why the timing relative to the residence change usually matters more than anything else about the decision.
Death Benefits Are a Separate Regime
There is a further allowance covering lump sums paid on death, distinct from the one applying during your lifetime, and pension death benefits have their own rules depending on age at death and how benefits are taken. Anyone doing estate planning around a pension should treat that as a separate exercise rather than assuming the lifetime cap answers it — and should check nominations are current, since they pass outside a will.
Frequently Asked Questions
Is there still a limit on how big my pension can be?
No. The lifetime allowance charge on pot size has gone. What remains is the £268,275 cap on tax-free lump sums, which limits extraction rather than accumulation.
Can I still take 25% of my pension tax free?
Generally yes, scheme by scheme, subject to the overall £268,275 ceiling. Larger pots reach the ceiling before they reach a quarter of the total, and the balance is taxable when drawn.
What if I registered lifetime allowance protection?
It may give you a higher personal figure than the standard cap, and it carried over into the new rules. Find the certificate and tell your provider, because schemes apply the standard figure unless told otherwise.
Should I take my tax-free cash as soon as I can?
Usually not without a reason. Money inside a pension grows free of income tax and capital gains tax, and drawing taxable income alongside a lump sum can trigger the £10,000 money purchase annual allowance.
Related Guides
Keep reading with these related guides and calculators:
- The annual allowance taper — the limit that still binds
- Lump sums abroad — why residence changes the answer
- Drawdown vs annuity — what to do with the other 75%
- Emergency tax on withdrawals — what happens to the first payment
- Pension tax relief — the relief going in
- Pension pot calculator — what a pot produces as income
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