While many Budgets end up with a few pence on a pint of beer here, and a tweak to tax allowances there, the chancellor occasionally unveils something more unexpected.
During the 2023 spring Budget, Jeremy Hunt surprised many by announcing some fundamental changes to pension saving rules. Designed to encourage older people to remain in the workplace, and to encourage the recently retired to return to work, the reforms will enable many people to build up more tax-efficient pension savings.
If you’re approaching, at, or in retirement, these changes could affect you. Here’s what you need to know.
1. Lifetime Allowance tax charge has been removed
Previously, the Lifetime Allowance (LTA) restricted the amount of tax-efficient savings you could accrue over your lifetime. It was set at £1,073,100 in the 2022/23 tax year, and included both your and employer contributions, as well as tax relief and investment growth.
Withdrawing any funds above the LTA was then subject to a tax charge of 25% for money drawn as income, and 55% for money taken as a lump sum, in addition to any Income Tax that was payable.
In the spring Budget, the chancellor removed the LTA tax charge for the 2023/24 tax year, and pledged to abolish the LTA altogether in a future Finance Bill.
What this means is that you can now potentially accrue a much larger fund – subject to annual allowances – without having to pay an additional tax charge. It could mean you benefit from more tax-efficient pension savings, sustaining a more comfortable retirement lifestyle.
Note that the maximum pension commencement lump sum you are able to take will be restricted to £268,175. So, you won’t be able to amass a significant fund and take 25% of it as a tax-free lump sum.
2. Annual Allowance rises to £60,000
The Annual Allowance is the maximum amount of tax-relievable pension savings you can accrue each tax year. In 2023/24 this has been increased from £40,000 to £60,000 gross (or 100% of your earnings if lower).
This means you can accrue significantly more tax-efficient pension savings each year than previously.
The ability to carry forward any unused Annual Allowance or the previous three tax years has also been retained.
So, if you have a lump sum, you could make a potential tax-relievable contribution of £180,000 to your pension from 6 April 2023 (using the Annual Allowance of £40,000 for 2020/21, 2021/22 and 2022/23, and £60,000 for 23/24).
3. Tapered Annual Allowance rises to £10,000
The Tapered Annual Allowance (TAA) reduces the Annual Allowance for high earners. It restricts the amount of tax-efficient pension savings an individual can make if they have “threshold income” of £200,000 and “adjusted income” (essentially earnings plus employer pension contributions) of £260,000.
In the Budget, the chancellor increased the minimum amount under the taper from £4,000 to £10,000.
If your adjusted income is more than £260,000, you’ll lose £1 of Annual Allowance for every £2 you earn over this amount. So, if you earn £360,000 or more, you’ll be subject to the full TAA and be able to contribute £10,000 tax-efficiently to your pension in the 2023/24 tax year.
This chance means high earners will be able to make more tax-relievable pension contributions. Remember that the TAA does not apply if you have threshold income of £200,000 or less. The calculations here can be complex so, if you believe you may be affected by the taper, seeking professional financial advice can help.
4. Money Purchase Annual Allowance rises to £10,000
If you start to flexibly access your pension, or take your entire pension as a lump sum (with some exceptions) you could trigger the Money Purchase Annual Allowance (MPAA).
This restricts the amount of tax-efficient pension savings you can make once you have started to flexibly draw from your pension. In the Budget, the chancellor increased the MPAA from £4,000 to £10,000.
If you are working part-time, for example, you may have started to draw from your pension to supplement your income. However, you may still want to benefit from the tax relief and employer contributions available when making contributions to your pension.
This reform enables you to save more into your fund each year, providing a real boost if you want to build up your fund ahead of stopping work for good.
Get in touch
These four reforms could help you to build up more tax-efficient pension savings and sustain a more comfortable lifestyle in your retirement.
To find out how they affect you, and how you may be able to take full advantage, please email email@example.com or call us on 01189 876655.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.