Key spring budget takeaways
- In today’s budget the chancellor has announced plans to abolish the lifetime allowance (LTA).
- The annual allowance will also be increased from £40,000 to £60,000 per year.
- The Money Purchase Annual Allowance will be increased from £4,000 to £10,000.
- Tax free cash (also known as a pension commencement lump sum – PCLS) will be capped at 25% of the current lifetime allowance except where protections apply. It will be £268,275.
- The adjusted income level required for the tapered annual allowance to apply to an individual will be increased from £240,000 to £260,000.
It was a game changing budget for pensions. Chancellor Jeremy Hunt’s decision to abolish the lifetime allowance and boost annual allowances brings a breath of fresh air to those whose retirement planning has been stifled by years of tax cuts and freezes.
The constant tinkering and reductions in both allowances has acted as a real disincentive for higher earners to save into a pension over the years. The biggest unintended consequence of the rules saw senior NHS professionals choosing to retire early in recent years because of the tax charges they were triggering.
The changes set out today bring significant headroom back into the retirement plans of people who might have taken a step back from pensions for fear of breaching these allowances. However, they also simplify things for everyone.
This article isn’t personal advice, if you’re not sure what’s right for your circumstances, ask for financial advice. Tax rules can change and benefits depend on personal circumstances.
What’s changing for the lifetime allowance?
The lifetime allowance itself is set to be abolished from April 2024, in the meantime the lifetime allowance charge will be removed from 6 April 2023 meaning no-one will incur the charge. This will be welcomed by many who see this allowance as a tax on investment growth and unnecessary in a regime where there is already an annual allowance in play.
The upper limit on the tax free cash someone can take from their pensions is being capped at 25% of the current LTA (£268,275) from 6 April 2023 unless you have protections that entitle you to a higher level, but this remains a significant benefit.
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What’s happening to the pension annual allowance?
The annual allowance will increase from £40,000 to £60,000 from 6 April 2023.
This is the maximum amount someone can contribute to a pension each year while still receiving tax relief. This allowance has also suffered lots of tinkering over the years.
In 2010/11 it stood at £255,000 before being reduced to £50,000, and then again to its current level of £40,000 – it’s been here since 2014/15. However, as wages have climbed we’ve seen more and more people breaching the allowance – over 41,000 declared a breach in their self-assessment tax returns for 2020/21.
People who might have limited contributions to their pensions for several years now face the prospect of being able to significantly boost their retirement wealth.
What about tapered and money purchase annual allowances?
The money purchase annual allowance (MPAA) and tapered annual allowance are significant complicating factors that can restrict people’s pension contributions to as low as £4,000 per year. Again, the government’s decision to increase these to £10,000 from 6 April 2023 will be welcomed.
The government’s drive to encourage older people back into the workforce could be significantly boosted by a reform of the MPAA. The current restriction of £4,000 was a significant obstacle for people looking to rebuild their pension after having previously accessed it – the boost to £10,000 will give people significantly more headroom though ultimately this is a restriction we would like to see replaced.
The tapered annual allowance is a further issue for high earners.
Since 2020, anyone with an adjusted income of over £240,000 per year and threshold income of more than £200,000 has seen their annual allowance squeezed. For every £2 they earn over £240,000, they lose £1 of their annual allowance down to a minimum of just £4,000. In today’s announcement the adjusted income level required for the tapered annual allowance to apply to an individual increases from £240,000 to £260,000 on 6 April 2023 and the minimum amount they can be tapered to will increase to £10,000.
Overall, these changes are great news for pensions, but it’s important to make sure you have a full view of your pension arrangements before making any further decisions and take advice if necessary.
We’ll have to wait for further updates on exactly how those who have protection on their pensions will be impacted.
Pensions and Retirement Advice from HL
Get a deeper understanding of how the changes to the lifetime and annual allowances apply to you.
A financial adviser can help you review your retirement plan and give you the confidence that you’re making informed decisions.
Find out:
- Whether you could or should increase your pension contributions
- The effect on any pension protections you may have taken out (once this has been announced)
- If and how you could mitigate the effects of the money purchase annual allowance or tapered annual allowance
- If you could save tax in other ways such as capital gains tax
Book a call with our advisory helpdesk to find out more. They won’t provide personal advice, but they’ll help you decide if you’d benefit from advice and discuss the charges involved. They’ll then put you in touch with an adviser if you decide our service is right for you.
Article image credit: Andrew Aitchison / Getty images.