In a bid to encourage early retirees back to work, chancellor Jeremy Hunt unveiled several changes to pension allowances during the Budget. The announcements could mean you’re able to save more in your pension and boost your retirement income.
Here are the four key pension changes Hunt announced.
1. The Lifetime Allowance will be abolished
Previously, the Lifetime Allowance (LTA) has limited the amount of pension benefits you could tax-efficiently build up in total. Those that exceeded the allowance could face an additional tax charge when they accessed their savings. In the 2022/23 tax year, the LTA was £1,073,100.
It meant that some savers stopped pension contributions or even retired early because they didn’t want to cross the threshold.
For the 2023/24 tax year, the charge for exceeding the LTA has changed to 0%, and it’s expected the government will abolish the LTA in April 2024. So, if you were nearing the LTA threshold, you could add more to your pension without worrying about paying more tax.
2. The Annual Allowance has increased to £60,000
While the government is scrapping the LTA, the Annual Allowance will remain in place. However, the maximum amount you can save into a pension tax-efficiently each tax year will rise from £40,000 to £60,000.
This means you can place up to £60,000 (or 100% of your annual earnings) and receive tax relief on your contributions. Tax relief is given at the highest rate of Income Tax you pay, so it could provide a welcome boost to your retirement savings.
As a result, it’s worth reviewing your current pension contributions and calculating if increasing them could make sense for your financial plan.
3. The Money Purchase Annual Allowance is now £10,000
If you’ve flexibly accessed your defined contribution (DC) pension, you may be affected by the Money Purchase Annual Allowance (MPAA).
The MPAA reduces how much you can tax-efficiently save into your pension. As retirement has become more flexible, the MPAA is affecting more people. It may affect workers who use their pension to create an income during a career break and then return to work, or those that have semi-retired and want to continue adding to their pension.
During the Budget, Hunt announced the MPAA would rise from £4,000 to £10,000. So, if you’ve taken an income from your pension, you may now be able to save more tax-efficiently.
4. The amount high earners can tax-efficiently save has increased
The amount high earners can tax-efficiently save into their pension is affected by the Tapered Annual Allowance. This allowance has now increased from £4,000 to £10,000.
The “threshold income” for the Tapered Annual Allowance has also increased from £240,000 to £260,000.
The amount you could tax-efficiently save into a pension falls by £1 for every £2 your income exceeds the threshold for the Tapered Annual Allowance. It can fall by a maximum of £50,000 to £10,000.
The changes mean that high earners will now be able to contribute more to their pension tax-efficiently, and some may no longer be affected by the Tapered Annual Allowance.
Should you increase your pension contributions in 2023/24?
The changes announced in the Budget mean many workers could tax-efficiently contribute more to their pension in 2023/24. So, should you increase your contributions?
There are many reasons why adding more to your pension makes sense. It’s a way to invest in your future and could mean you enjoy a more comfortable retirement. As you could receive tax relief on your contributions and investment returns are free from Capital Gains Tax, a pension could be a valuable way to invest for the long term.
However, you should keep in mind that pension contributions aren’t usually accessible until you are 55, rising to 57 in 2028. As a result, you couldn’t make a withdrawal to cover emergencies or other outgoings before you reach retirement age.
If you are thinking about increasing your pension contributions, you should review your wider financial plan to balance short- and long-term goals.
Contact us to create a tailored financial plan
A tailored financial plan could help you reach your retirement goals, whether you’re close to the milestone or it’s still years away. Please contact us to arrange a meeting and discuss what steps you could take to get on track for the retirement you want.
Please note: 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.