Pension drawdown after the 2025 reforms — a quiet but consequential change
The reforms to lump-sum allowances and the removal of the lifetime allowance have settled into the system. Here is what we are seeing in client portfolios twelve months on.
It has been twelve months since the major changes to the pension lump-sum regime took effect, and the dust has largely settled. The lifetime allowance is gone; in its place sit the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance — for most clients, £268,275 and £1,073,100 respectively. The changes were significant, but the implementation has been quieter than the legislative period suggested.
What the reforms changed in practice
For our clients with mid-sized pension pots — between £400,000 and £1.5 million — the immediate effect was modest. The 25% tax-free lump sum, capped at £268,275, was already the practical limit. The end of the lifetime allowance removed an active concern for clients approaching £1m, but the new Lump Sum and Death Benefit Allowance has reinstated a similar (if subtler) ceiling on what passes free of tax on death.
For wealthier clients — those with multiple pensions, or pensions inherited from a spouse — the new framework has been genuinely beneficial. We have seen several clients this year whose total pension wealth is now structured more flexibly than the old lifetime-allowance regime permitted.
What we are watching
Two changes deserve continued attention.
The first is the treatment of pensions on death. Under the previous regime, pensions inherited before age 75 were largely free of income tax in the hands of the beneficiary. The Treasury has signalled that this position is under review for future tax years. For clients who have been using pension wealth as an explicit IHT-planning lever, we are reviewing whether the planning still works under reasonable forward-looking assumptions.
The second is the interaction between the Money Purchase Annual Allowance (MPAA) and flexible drawdown. We continue to see clients who have triggered the £10,000 MPAA without realising it, restricting their future pension contributions in ways they had not intended. If you have taken any flexible income from a pension this year, please flag it at your next review.
Practical actions for the year ahead
For each client in drawdown, we are repeating a small piece of work at this year's review: re-running the cashflow model with the post-reform allowances and reviewing whether the planned sequence of withdrawals still makes sense. In most cases the answer is "yes, with minor adjustment." In a few cases the answer is "we should restructure" — usually because the client's circumstances (not the rules) have changed.
This is normal, careful work. The reforms have not produced a sudden need to do anything dramatic; they have produced a clearer set of allowances to plan against.