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Pension changes make retirement saving more attractive
Pensions got a major overhaul in the Chancellor’s Budget announcements, with an increase in the amount you can put into your pension each year and an effective removal of the limit that your pension can reach before facing significant penalties of as much as 55%.
Rise in Annual Allowances
From April, the Annual Allowance – the amount you can put into your pension each year and receive tax relief, providing you have paid enough in tax in a year to warrant it, as the taxman will not give you more in relief than you have paid – will rise from £40,000 to £60,000.
There is also a rise in the Money Purchase Annual Allowance, which is the amount you can pay into a money purchase pension each year once you have vested part of it. This rises from £4,000 to £10,000 for the 2023/24 tax year – taking it back to its previous level.
The Tapered Annual Allowance is also going up from £4,000 back to its original level of £10,000. This taper kicked in at an ‘adjusted income’ level of £240,000, but this also rises to £260,000 for the 2023/24 tax year.
Lifetime Allowance effectively removed from April 2023
One of the most eye-catching measures in the Budget was the effective removal of the Lifetime Allowance, which limited the amount a pension fund could grow to £1,0731,000 before charges of up to 55% were applied on the additional amounts unless someone had a ‘protected pension’.
From April 6, these penalties will no longer apply, meaning there is no longer a penalty for passing this limit. This renders the Lifetime Allowance irrelevant as there will not be a penalty for breaching it. But it will take separate legislation to remove the Lifetime Allowance itself completely.
This is something that will be valuable particularly for some senior NHS doctors, as there has been a rising trend in them leaving the profession through early retirement, in part at least to prevent their pension going over the Lifetime Allowance.
Limit on the tax-free lump sum
However, there is a cap on the amount that someone can take from their pension as a 25% tax-free lump sum, thanks to the removal of the penalties being removed for breaching the Lifetime Allowance.
From April 6, you will only be able to take a maximum of £268,275 tax-free from your pension, which is the same as the maximum you could take under the Lifetime Allowance.
These measures combined are expected to cost the Treasury around £4 billion over the next five years.
We can help you
These pension changes are wide ranging and could significantly change your retirement planning, so if you want to know more about how you can make the most of these changes, then please get in touch and we will be happy to help.