HMRC to bring in major rule change as anyone with a pension urged 'to check'

One of the largest shake-ups in two decades to the way that pensions are taxed is due to come into effect next month, affecting all people drawing money for their retirement. From April 6, the cap at which pension savings start incurring a tax charge will be removed.

The Finance Bill, which was approved in February, scraps the lifetime allowance, which makes the first £1,073,100 in pension savings entirely tax-free, with a high tax rate of 55 per cent for everything withdrawn over that limit.

Treasury minister Nigel Huddleston said measures put in place by the Bill will "encourage people to stay in work and utilise their expertise for longer", with the Office for Budget Responsibility estimating that the abolishment of the lifetime allowance would retain 15,000 workers annually.

READ MORE: DWP issues update on 'crucial' change to pensions from August

Mr Huddleston told the House of Commons: “The Bill will complete the abolition of the lifetime allowance, amending pension tax rules so that employees with valuable, hard-earned expertise are no longer encouraged to reduce their hours or retire early.” Chancellor Jeremy Hunt announced the measure in last year's spring budget, with the aim of ensuring doctors in particular do not retire early and leave gaps in the NHS workforce.

From next week, the lifetime allowance will be replaced by two new taxes on lump sum withdrawals, which could catch some pensioners out.

Called the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA), the new tax arrangement will allow people to withdraw up to a quarter of the current lifetime allowance, £268,275, in lump sums from their pension scheme before they are taxed on their withdrawals. But depending on the