On 15 March 2023, chancellor Jeremy Hunt gave a speech outlining his spring Budget. In it, he announced a string of changes designed to stimulate economic growth and manage inflation.
One of the ways that he aims to achieve this is by encouraging retirees to come back to work and keep those approaching retirement age in work for a few more years. As a result, several changes to pension rules came into effect on 6 April 2023.
The good news is that these changes may allow you to make more tax-efficient contributions to your retirement savings. However, it is important that you understand what has changed and how it may affect you, so you can take full advantage of all the appropriate allowances.
Read on to learn about four major Budget changes to pensions you need to know about.
1. The Lifetime Allowance has been effectively abolished
Changes to the Lifetime Allowance (LTA) were expected but the chancellor surprised many people by announcing that it would eventually be scrapped altogether.
The LTA is the total amount of tax-efficient pension savings you can accrue in your lifetime – including your contributions as well as employer contributions, investment returns, and tax relief.
This was set at £1,073,100 in the 2022/23 tax year and you would have likely faced additional tax charges when you came to withdraw any pension savings above this limit.
This may have encouraged some people to retire instead of staying in work because they had reached the limit and could no longer benefit from tax relief on their pension contributions.
In the Budget, Jeremy Hunt announced plans to abolish the LTA in the future, which is positive news for many. Ultimately, this means you can contribute more to your pension without facing a tax charge when you come to withdraw. It could also make your pension a more effective vehicle for tax planning and reducing a potential Inheritance Tax (IHT) bill for your family.
Although it will not be officially abolished until a later date, the LTA tax charge was removed on 6 April 2023, effectively removing the LTA.
2. Annual Allowance increased from £40,000 to £60,000
While the LTA will no longer affect you, your tax-efficient pension contributions may still be limited by the Annual Allowance. This is the amount you can contribute to your pension, including employer contributions, in one year and still receive tax relief.
This allowance still applies but it was increased from £40,000 to £60,000 (or 100% of earnings, if lower) on 6 April 2023, meaning you can make more tax-efficient contributions to your pension.
3. Money Purchase Annual Allowance increased from £4,000 to £10,000
A desire to keep people in work and encourage people to return to work after retiring was the driving force behind many of the pension changes, including changes to the Money Purchase Annual Allowance (MPAA).
The MPAA usually comes into effect once you start drawing flexibly from your defined contribution (DC) pension. Once it is triggered, it limits the amount that you can then contribute to your pension while still receiving tax relief.
While it still applies, this allowance increased from £4,000 to £10,000 on 6 April 2023. This may give you more flexibility to continue working part-time in later life or return to work after you have already started flexibly drawing from your pension.
According to PensionsAge, ‘semi-retirement’ is becoming more common, with 44% of 55 to 64-year-olds planning to move into semi-retirement before they reach 65.
The changes to the MPAA mean that you can do this and still have more opportunity to build your pension savings for later life.
4. Minimum Tapered Annual Allowance increased from £4,000 to £10,000
The Tapered Annual Allowance (TAA) limits the tax relief that high earners can receive on their pension contributions. If your ‘adjusted income’ – essentially your earnings and employer pension contributions – is more than £260,000, your Annual Allowance may be reduced.
Your Annual Allowance will normally be reduced by £1 for every £2 that you exceed the threshold, which was raised from £240,000 to £260,000 on 6 April 2023.
The minimum Tapered Annual Allowance also increased from £4,000 to £10,000. This is positive news for people affected by the TAA because your Annual Allowance cannot be reduced by as much as previously.
Recently, when sitting down with a client to assess the post-Budget changes, we identified that the tax benefits for increasing contributions had now increased significantly, in fact, by tens of thousands of pounds. Where previously the ability to contribute to a pension was limited to around £4,000, the recent Budget entirely changed the mechanics of making additional pension contributions. This, alongside the abolition of the LTA, required a change in strategy and a significant improvement to our client’s financial position.
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Many of these changes mean that you can make more tax-efficient contributions to your retirement savings, and you may benefit from staying in work for longer.
However, there are still certain pension rules like the TAA and the MPAA that could reduce the amount of tax relief you receive, and it is important that you understand whether you are affected or not.
It may be a good idea to re-assess your retirement planning in light of these changes so you can maximise your savings.
If you need advice about pension planning and how recent changes may affect you, we are here to help.
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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.
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