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Chancellor Jeremy Hunt's Spring Budget, announced in March 2023, brought some welcome but unexpected changes to pension tax. The changes are designed to alleviate the impact of strict pension rules, which are believed by Mr Hunt to have had a negative impact on the country's labour market, and as a result some Britons may now wish to review their current pension savings arrangements.
LTA for Registered Pension Schemes completely removed
The most notable change was the abolition of the pension Lifetime Allowance (LTA) charge. As of 6th April 2023, the LTA for registered pension schemes has been completely removed, with total abolition set for April 2024. The LTA was previously the maximum amount of savings an individual could make in a lifetime into a registered pension scheme without incurring a tax penalty.
The standard LTA for the 2022/23 tax year was set at £1,073,100, which meant those with pensions exceeding this amount would face a tax charge. However, with the abolition of the LTA, individuals can now contribute as much as they like to their pension schemes without fear of being penalised for exceeding the allowance.
This is particularly good news for those with pensions of significant value, as they will no longer be forced to limit their contributions to avoid a tax charge. If you paused pension contributions because you were concerned you might breach the LTA, you may decide you want to make further tax-efficient additions to your pot. It is also worth noting that the government tax relief on pension contributions will still be available, which means individuals can continue to benefit from this incentive.
Tax-Free Lump Sum
Additionally, under the previous LTA rules, an individual could withdraw up to 25% of their pension savings as a tax-free lump sum, but that has now changed. The tax-free lump sum that can be drawn at age 55 (rising to 57 in April 2028) is now capped at £268,275, and it is expected that another cap will be set in 2024 once the LTA is fully abolished.
This means that those who have saved a large amount in their pension may not be able to withdraw as much as they had planned, and to ensure that your retirement plans are not affected by these changes, it may be useful to seek professional financial advice from a certified wealth planner to discuss the best course of action for your situation.
When making contributions to your pension, it is important to bear in mind that there is a limit to how much you can contribute each year without incurring additional taxes. This limit is known as the pension Annual Allowance (AA).
The new legislation introduced on 6th April 2023 has presented significant increased savings opportunities for some. Among other things, the pension AA increased from £40,000 to £60,000, meaning you can now save more into your pension pot before you pay tax.
Additionally, the ‘adjusted income’ threshold for AA tapering increased from £240,000 to £260,000 and the minimum tapered AA increased from £4,000 to £10,000 (meaning that individuals with annual adjusted income of £360,000 or more will have an AA of £10,000).
What happens if I exceed the AA?
If you exceed the AA, this means you won't receive tax relief on the excess contributions, and you may be subject to an AA charge. One way to reduce or mitigate this charge is by taking advantage of carry forward. This option allows you to use any unused allowance from the previous three tax years to offset your contribution in the current year.
However, you will need to make sure that you don't exceed your pension AA in the current tax year, even after using carry forward.
Carry forward is not available to everyone. Those who have flexibly accessed their defined contribution pension pot are subject to the Money Purchase Annual Allowance (MPAA). The MPAA reduces the amount that can be contributed to your defined contribution pensions while still getting tax relief to £10,000, and carry forward can no longer be used.
You can find out more about the MPAA on the Governments’ Moneyhelper website (www.moneyhelper.org.uk).
If you do find yourself facing a pension AA charge, you may be able to ask your pension scheme to pay the charge from your pension using Scheme Pays. This would result in a reduction in your pension, so it is important to carefully consider whether this is the right option for you.
It is important to recognise the tax benefits associated with contributing to your pension plan and staying up to date on changes to pension allowances and contribution rules. In light of the new allowance levels and given the tax benefits received, it is definitely worth considering whether the increased contribution limits now available could help you meet your long-term retirement savings goals.
These changes mark a significant change to the UK's pension system - it remains to be seen how they will impact pension savings and retirement planning in the years to come.
Please note: This content is for general information only and does not constitute advice. The information is aimed at retail clients only.
The content was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.
This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means-tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.