Pension changes formed an important part of this year’s Spring Budget.
On 15 March, Chancellor of the Exchequer, Jeremy Hunt, set out his plans to grow the UK economy and bring inflation under control. A significant part of his growth plan appears to be to get people back to work, especially those that have taken early retirement. This seems to have been his motivation to make some major pension changes to allowances.
How they will affect you will of course depend on your circumstances. But here are the changes made that affect pensions:
- The pension annual allowance is to increase from £40,000 to £60,000.
- The money purchase annual allowance will increase from £4,000 to £10,000.
- The tapered annual allowance will be updated.
- The lifetime allowance will be removed entirely.
The Government Actuary’s Department have analysed the Budget announcement similarly.
So, let’s look at each of these pension changes in a little more detail.
Pension Annual Allowance Changes
The pensions annual allowance is the maximum amount of tax-relieved pension savings that can be accrued in a year. This will be increased from £40,000 to £60,000, from 6 April 2023.
Money Purchase Annual Allowance Changes
If you take any taxable money from your pension plan, via drawdown or lump sum, your allowance could reduce. The amount you can save into your plan will usually reduce from £40,000 to £4,000. This is known as the money purchase annual allowance.
In his Budget, the Chancellor announced that this will go up from £4,000 to £10,000 p.a.. This’ll make it easier for you to keep working and saving after taking money from your pension pot.
This could be useful for anyone who dipped into their pension pot to help top up their income during the pandemic. Or to mitigate inflation and fuel price rises.
Tapered Annual Allowance Update
If you’re a higher earner, then you might have been impacted by an allowance known as the tapered annual allowance. This gradually reduces the amount you can save into your pension plan each tax year depending on your earnings. Your allowance wouldn’t reduce to any lower than £4,000. This lower limit will be increased to £10,000 in the new tax year.
Lifetime Allowance Removed
The lifetime allowance is the total amount you can build in all your pension savings in your lifetime before incurring a tax charge. If your pension savings are worth more, you’d need to pay tax on anything over the allowance, also known as the ‘excess’.
The lifetime allowance is currently £1,073,100. We were told in the 2021 Spring Budget that it would stay there until 2026. However, the Chancellor announced that the lifetime allowance will be removed, and no one will face a lifetime allowance tax charge from 6 April 2023.
It’s good news for those close to, or already affected by, the previous allowance. It means you can give your pension savings a boost without worrying about paying any extra tax. Or, if you were planning to take your pension money soon but found you were over the previous allowance, you might now avoid up to 55% in tax charges.
Please note that for most people, the amount you can take as your tax-free entitlement will stay at 25% of the previous lifetime allowance limit of £1,073,100.
Will the Spring Budget’s Pension Changes Affect Me?
The Chancellor’s pension changes have been designed to make it more appealing to stay in work longer, or to come out of retirement. This means they’ll mainly impact those who in, or close to, retirement and at the higher end of the earnings range.
So, if you want to keep working and paying into your pension for a little longer, then the changes could be good news for you. You might want to do this ton aim for a more comfortable retirement, or because working makes it easier for you to keep up with inflation.
The tax benefits your pension plan offers effectively means it costs you less to pay more into your plan. So making the most of these benefits while your pension allowances are higher, if you can, could really help to give your pension savings a boost.
If you’re still early on in your career, have no plans to access your pension savings anytime soon or are currently a lower earner, you’re unlikely to notice too much of a difference in the short term.
Overall, you can now save more towards your future with the help of these tax benefits your pension plan has to offer.
For the full list of Budget announcements, not just the pensions changes, see the Government announcement.
How Can I Make the Most of the New Pension Changes to Allowances?
If you’d like to review your pension payments or consider making a top up to your plan, I recommend you talk to me beforehand.
If you have questions about how any of the changes from today’s Budget will impact you, you should speak to a financial adviser, like me. I’ll be able to tell you exactly what the changes mean for you based on your personal circumstances.
As ever, remember that pension plans are investments. They can go down as well as up in value and may be worth less than what was paid in.
Tax rules and legislation may change. Your individual circumstances and where you live in the UK will have an impact on the tax you pay.
Contact me today to set up a discussion focussed on your circumstances.