The £268,275 Trap
How the Lifetime Lump Sum Allowance Changes Everything
If you have a pension pot over £1 million, this article could save you tens of thousands in unnecessary tax. The 2024 lifetime lump sum allowance rules have fundamentally changed pension planning, yet most calculators and advisors are still using outdated assumptions.
What Changed in April 2024?
The UK government introduced the lifetime lump sum allowance, capping the total tax-free amount you can withdraw from all your pensions at £268,275. This replaced the previous lifetime allowance system and caught many pension holders off guard.
The Trap: Most People Don't Realise When It Runs Out
With a £1.5 million pension pot, you'd expect to take £375,000 tax-free (25%). But the lifetime allowance caps this at just £268,275 — a difference of over £100,000 that becomes fully taxable.
Real Example: £1.5M Pot, £90K Annual Withdrawals
Let's see how this plays out in practice:
| Year | Withdrawal | Tax-Free | Taxable | Cumulative Tax-Free |
|---|---|---|---|---|
| 1 | £90,000 | £22,500 | £67,500 | £22,500 |
| 5 | £90,000 | £22,500 | £67,500 | £112,500 |
| 10 | £90,000 | £22,500 | £67,500 | £225,000 |
| 12 | £90,000 | £25 | £89,975 | £268,275 |
| 13+ | £90,000 | £0 | £90,000 | £268,275 |
Why This Matters More Than You Think
- Tax Shock: Your effective tax rate jumps from ~25% to 40%+ overnight
- Cash Flow Impact: £18,000 less annual income when the allowance runs out
- Lifetime Cost: Could cost £200,000+ over a 20-year retirement
- Planning Complexity: Requires precise withdrawal timing and spouse coordination
What Most Calculators Get Wrong
Standard pension calculators assume you can take 25% tax-free forever. This gives dangerously optimistic projections for large pension pots. Our calculator:
- Tracks cumulative tax-free usage across all years
- Shows exactly when your allowance will be exhausted
- Models the tax impact of crossing the threshold
- Helps optimise withdrawal timing to maximise benefits
Strategies to Maximise Your Allowance
- Early Acceleration: Take larger lump sums early to use the allowance efficiently
- Spouse Coordination: Each partner has their own £268,275 allowance
- Timing Optimisation: Delay state pension to stay in lower tax bands
- Income Smoothing: Balance withdrawal amounts to optimise total tax