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Previously, the opportunity for higher earners to contribute into a pension was predominantly curtailed by two restrictions: the Annual Allowance (AA) which restricts the amount that a person can pay into a pension during a particular year, and the Lifetime Allowance (LTA), which puts a cap on the total fund that can be accrued in a lifetime.
These restrictions particularly affected public sector workers, such as senior NHS clinicians, as their employer’s pension contributions are based on earnings, irrespective of any limits being breached. This resulted in many professionals choosing to work less or retire early.
By removing the LTA and increasing AA limits the Chancellor hopes that doctors and other high earners will choose to remain in work, thus boosting the labour market.
What do the changes mean for your own retirement planning?
Many UK pension savers, particularly higher earners, who were previously close to the LTA or AA limits may now be able to consider saving more into a pension or resuming their contributions.
Here’s a summary of the major changes and the opportunities they may provide:
Abolition of the LTA charge: Previously, individuals could save up to £1,073,100 in a registered pension scheme without incurring a tax penalty. Any savings over this amount were liable to tax at 55% if taken as a lump sum or 25% if taken in any other way, for example as pension payments or cash withdrawals. From 6th April 2023, the LTA charge was removed entirely, allowing individuals to contribute more to their pension schemes or to resume their payments, without fear of penalties.
Capped tax-free lump sum: Although the amount that you can save into your pension is no longer restricted, the amount that you can take as a tax-free lump sum is now capped at £268,275 (unless protection is in place). Previously you could take 25% of your total pension pots tax-free.
Increased AA: The AA is the maximum amount that you can save into your pension pots in a tax year and receive tax relief. It has been raised from £40,000 to £60,000, providing increased savings opportunities for higher earners. It may also be possible to carry over any unused AA from the previous 3 tax years. This increase could be of particular interest to those who will be paying additional rate tax for the first time due to the threshold reduction.
Tapered annual allowance: The minimum tapered annual allowance rises from £4,000 to £10,000, with the adjusted income threshold increasing to £260,000. The threshold income figure remains at £200,000, which means more people will be able to make larger contributions without being subject to tapering. Broadly speaking, adjusted income includes all pension contributions (including any employer contributions), while threshold income excludes pension contributions. However, advice should be sought when calculating adjusted and threshold income.
Money Purchase Annual Allowance (MPAA): The MPAA has increased from £4,000 to £10,000 which enables more of those who have already started drawing an income from their pensions to continue or return to work without facing penalties for participating in workplace pension schemes.
Personal income tax allowance: If adjusted net income falls below £100,000, the Personal Allowance will be reinstated. Therefore, if you have an income of £160,000, contributing the full £60,000 AA (or more if you have an unused carry-forward allowance) could potentially regain your Personal Allowance.
Significant impact on your retirement planning
Clearly these changes may provide new pension saving opportunities for many and could have a significant impact on your retirement planning and personal tax situation.
However, this is a complex area and advice should be sought from a certified financial planner to ensure that your own circumstances are considered before any action is taken.
This is particularly true for those with relevant LTA protections, as it will be critical to confirm how the reforms might affect any tax-free pension commencement lump sum, and what protections may be lost if pension contributions are resumed.
Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The content of this article 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.