What does the UK General Election mean for my annual and lifetime pension allowances in 2024?

On 22 May, Prime Minister Rishi Sunak called a general election for 4 July.

With Labour holding a significant lead in the polls, there's a strong possibility of a change in government.

When Jeremy Hunt announced scrapping the lifetime allowance in April 2023 Labour immediately announced that this was not a priority for them and they would reinstate the allowance. However with the election fast approaching they have told journalists that this is no longer the case. Labour will publish its manifesto on June 13.

This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.

Pension and tax rules can change, and any benefit depends on individual circumstances. Remember, you can’t usually take money out of a pension until at least age 55 (rising to 57 from 2028).

What is the Pension Annual Allowance?

The pension annual allowance currently stands at £60,000. This is the maximum amount you can contribute to your pensions each tax year without triggering a tax charge.

Pension contributions include those made by you, your employer, or anyone else, plus any basic-rate tax relief added by the government.

For high earners, lower limits might apply. If your threshold income exceeds £200,000 and adjusted income surpasses £260,000, your annual allowance will decrease by £1 for every £2 of adjusted income over £260,000, down to a minimum of £10,000.

Example: If your adjusted income is £280,000, your annual allowance would reduce to £50,000. An adjusted income of £360,000 or more reduces your annual allowance to £10,000.

You can also contribute to the pension of a non-earning spouse, partner, or child up to £2,880 annually, which counts towards their annual allowance.

What was the pension lifetime allowance?

The lifetime allowance (LTA) was the cap on the total value of pension benefits you could build up in your lifetime, set at £1,073,100. Exceeding this limit meant paying a tax charge on the excess. However, from 6 April 2024, the lifetime allowance was abolished and replaced with three new allowances:

Lump sum allowance

Applies to the tax-free element of certain lump sums, capped at £268,275. Exceeding this allowance results in taxation at your marginal rate.

Lump sum and death benefit allowance

Applies to the tax-free element of lump sum payments and non-taxable lump sum death benefits, up to £1,073,100.

Overseas transfer allowance

Applies to pensions transferred overseas to a Qualifying Recognised Overseas Pension Scheme (QROPS), also capped at £1,073,100.

Not sure what this all means for you and your pension?

Strategies to maximise your pension benefits

Use carry forward

If you risk exceeding your annual allowance, you might be able to use unused allowances from the previous three tax years, potentially allowing contributions up to £200,000 in one year.

Monitor contributions

Keep track of all your pension contributions, including those from your employer and tax relief, to avoid unexpected tax charges.

Consider spousal contributions

Contributing to a spouse or partner’s pension can maximise tax efficiency and utilise their annual allowance.

The potential policy shifts under a new government could significantly impact pension planning. Understanding the current allowances and how they might change is crucial for making informed decisions.