The spring 23 Budget contained a surprise announcement from the UK Chancellor of the Exchequer Jeremy Hunt as he scrapped the pension lifetime allowance.
It could make a huge difference to your financial plans and at Continuum, we are looking at the potential for your future wealth:
What has changed?
The Chancellor’s focus in his Budget seems to have been to give those who have left the workforce, or who are considering doing so, reason to think again. Firstly, there is the annual allowance – the amount you can put into your pension each year, and then the lifetime allowance, the total value you can build up in your pension pot before the government starts charging extra tax. Breaching the lifetime allowance meant a 25% or 55% tax charge on the excess, depending on how you access the pension in retirement. It meant that continuing to work made little economic sense for many people in their later 50s.
The lifetime allowance – the total amount that workers could accumulate in their pension savings before paying extra tax – was £1,073,100 in the previous tax year. Workers aged over 50 were leaving the labour market in the greatest numbers in the wake of the Covid-19 pandemic as they found they were nearing this figure.
A significant number of doctors and consultants are known to have reduced their hours or retired early from the NHS because they were in danger of breaching the tax-free pensions lifetime allowance. Many other older professionals calculated that continuing to work was simply going to cost them money, depriving the economy of valuable skills.
It was rumoured that it would be increased as part of a move to get older workers back to work, however, the chancellor went further, abolishing the lifetime allowance altogether from April 2023, with its abolition meaning that the rewards of pension saving are now even greater.
What does this mean for your pension?
Savers with large pension pots will be able to save significant amounts of extra money from the removal of the lifetime allowance. It is a return to a position last seen some 15 years ago.
What about annual pension allowances?
The chancellor also announced that the annual allowance for pension contributions would rise – making it easier to take advantage of the abolition of the lifetime limit. The annual allowance restricts the total amount you can contribute to a pension each tax year and covers personal contributions, employer contributions and tax relief.
Go above it and you face paying a tax charge. However, the Chancellor has increased the limit from £40,000 to £60,000, and you still enjoy the tax relief of 20% for basic rate taxpayers and 40% and 45% as a higher and additional rate taxpayers respectively.
And if you have already dipped into your pension…
It was not mentioned in the Budget speech, but the money purchase annual allowance (MPAA) has also been relaxed in line with the policy of encouraging early retirees back to work.
The MPAA applies to anyone who has already taken income from their pension including those who flexibly accessed their private pension post-55 and was acting as a discouragement for continuing work. Once triggered, it reduced their annual allowance from £40,000 to just £4,000. This has been increased from £4,000 to £10,000 effective from 6 April 2023. Letting people contribute to their pension again could be an effective way to encourage them back to the workforce.
What should you do?
If you are planning your retirement, you need to understand the effects of these changes. There are still some restrictions – the limit to the amount of tax-free cash one can take is £268,275, which is the current maximum of 25% of the previous tax year’s Lifetime Allowance of £1,073,100, unless you hold certain valid protections.
Talk to us about your pension contributions.
