Earlier this year the government introduced several changes to UK pensions, including increasing the Annual Allowance from £40,000 to £60,000 and removing the Lifetime Allowance (LTA).
How could these changes affect you?
Whether you’re already retired or planning for your future, read on to find out how these changes could affect your savings and explore how to make the most of the revised pension rules.
1. The Annual Allowance increase could help to boost your savings
The Annual Allowance is the amount of money you could contribute to your pension each tax year before incurring tax. The allowance includes both your contributions and any that your employer makes.
In the 2023 Spring Budget, chancellor Jeremy Hunt increased the Annual Allowance from £40,000 to £60,000 for most people in the 2023/24 tax year.
The Annual Allowance applies across all your pension savings, not to each individual pension scheme. Also, if you earn less than £60,000 you are only entitled to tax relief up to 100% of your earnings.
If you can afford to pay in the full allowance, the Annual Allowance increase could help you benefit from more tax relief, giving your retirement savings a boost. And, if you have a workplace pension, any extra contributions you make might be matched by your employer.
You can pay more than £60,000 into your pension but you won’t benefit from tax relief on any amount that exceeds this limit.
However, if you have any unused Annual Allowance from previous tax years, you could carry this forward. For example, if you have an Annual Allowance of £60,000 and you only contribute £50,000 in the 2023/24 tax year, you could carry forward the unused £10,000 of your allowance to the 2024/25 tax year.
Remember though, you can only carry forward unused allowances from the three previous tax years. To find out if you could benefit from using carry forward to boost your pension savings, please get in touch.
2. Money Purchase Annual Allowance changes could make it easier for you to keep working and saving
If you start to take money from your defined contribution (DC) pension or withdraw the full amount as a lump sum, the Money Purchase Annual Allowance (MPAA) could come into effect. This reduces the amount you can contribute to your pension each year while still getting tax relief.
Before 6 April 2023, if you were subject to the MPAA, the amount you could pay into your pension each year was reduced from the standard Annual Allowance to £4,000. Happily, the Spring Budget increased the MPAA to £10,000.
This increase could make it easier for you to continue working and saving if you’ve dipped into your pension as you have more scope to top your pension pot back up.
The MPAA only applies after you have drawn down money from your pension, so any contributions made before this date are not affected. Taking money out of a defined benefit (DB) pension scheme, also known as a “final salary” pension scheme, does not trigger the MPAA.
3. An increase in the Tapered Annual Allowance could help higher earners to save more
If you’re a higher earner, you may have been affected by the Tapered Annual Allowance. This reduces your Annual Allowance to limit the amount of tax relief you can benefit from.
When determining how much your Annual Allowance will be reduced by, both your “threshold income” and your “adjusted income” will be taken into account. Your threshold income excludes pension contributions while your adjusted income includes all pension contributions.
If your threshold income is more than £200,000 and your adjusted income is above £260,000 you may be affected by the Tapered Annual Allowance. Calculating these two types of income can be complicated, so you might want to consider speaking to a financial planner for guidance.
If you meet the income requirements described above, your Annual Allowance will gradually be reduced depending on how much your adjusted income exceeds £260,000. This tapering stops at a fixed minimum amount, to ensure that everyone retains some of their Annual Allowance.
The Spring Budget increased the minimum reduced allowance from £4,000 to £10,000 for the 2023/24 tax year. This increase means that you could potentially benefit from more tax relief on your savings.
To find out more about how the Tapered Annual Allowance might affect you, please get in touch.
4. Removal of the Lifetime Allowance could help you save more over your lifetime
The Lifetime Allowance (LTA) was removed on 6 April 2023.
The LTA limited the total amount you could save in a pension fund over your lifetime tax-efficiently. If you built up more than the £1,073,100 limit, you could have been taxed at the following rates in 2022/23:
- 55% on funds drawn as a lump sum
- 25% on funds drawn as income on top of your marginal rate of Income Tax.
So, the removal of the LTA charge is good news if you’re rapidly approaching the previous £1,073,100 limit as you could now contribute more to your pension without paying an LTA tax charge.
If you stopped paying into your pension because you were nearing the limit, you might now want to consider restarting contributions.
By saving more in a pension fund you could make the most of your Annual Allowance while you’re still working and benefit from a better quality of living in retirement.
However, although the removal of the LTA means you can save more into your pension, the maximum Pension Commencement Lump Sum (PCLS) has been retained at its current level of £268,275 (25% of the current LTA of £1,073,000). So bear in mind that, unless you have existing rights, it isn’t possible to amass a £2 million pension pot and take 25% as a tax-free lump sum.
The removal of the LTA might also make pensions an attractive option for passing on your wealth. Pensions have long been recognised as a tax-efficient way to do this as they are not considered part of your estate for Inheritance Tax purposes. With the removal of the LTA, you could use your pension to pass more wealth to your family without incurring IHT.
By taking advantage of these new pension allowances, you could maximise your tax-efficient savings and make the most of your wealth.
Get in touch
If you’d like to learn more about the pension options available to you, please reach out to us. We can discuss your retirement plans and help you align these with your overall goals.
Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.
Please note
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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