April 20, 2023
If you’re saving for retirement, you might be interested to explore the changes announced in the March 2023 budget. Chancellor Jeremy Hunt announced three key changes which affect pension savers.
The Chancellor announced that one of the reasons for these changes was to incentivise older people to stay in work longer (or return to work if they’ve already retired).
He presented it as a move to stem the tide of NHS consultants retiring early, and, coupled with the freezing of general tax thresholds which will see tax bills increasing for many, the move has been heavily criticised in some quarters as being a bonus for the wealthy few.
It is true that these changes will mostly benefit those in higher income brackets, who are already saving large amounts into their pension each year, or have amassed a large pension pot during the course of their career.
If that applies to you, read on while we look at each of these changes.
One of the biggest changes is the increase in the amount that can be invested into a pension each year (known as the pensions annual allowance).
You can only receive tax relief on up to 100% of your earned income so, if you earn £50,000 a year, that’s how much you can pay into your pension – previously you would have been limited to £40,000.
If you’re a higher earner, it’s a little more complicated than that, but the good news is that you can potentially also save more tax free. Higher earners have restrictions (tapered annual allowances for incomes above £260,000) on how much they can save tax-free in a pension each year, but the level at which the restriction starts has increased from £240,000 to £260,000 and the minimum tapered annual allowance has also been increased to £10,000 from £4,000.
Once again, it looks as though this change is designed to encourage higher earners to continue working (and saving) for a bit longer.
The lifetime allowance and associated tax charges were introduced in 2006 to effectively place a cap on the amount of tax relief that could be gained through pension contributions. With an initial limit of £1,500,000 which rose to £1,800,000 by the 2010/11 tax year, it was only of concern to a relatively small number of wealthy savers.
In April 2012 the Government began to reduce the lifetime allowance which meant greater numbers were caught by it. Getting as low as £1,000,000 in 2016 it had risen back to just £1,073,100 and begun to trouble more and more high earners causing some to stop work earlier than planned.
In a staggered change, the ‘lifetime allowance charge’ has been scrapped from 6 April 2023 but the allowance itself still exists in legislation until 6 April 2024. The amount you can take as a tax-free lump sum will still be capped at £268,275, being 25% of the 22/23 allowance of £1,073,100.
The lifetime allowance previously applied to all pension benefits (excluding the state pension) meaning some quite complex calculations could be required for people with multiple pension schemes.
If you’re a high earner and have been concerned about your pension pot exceeding the lifetime allowance, this may be the time to reassess your options.
It’s also something worth considering if you are one of the over-50s thinking about taking early retirement, or are already retired and are considering whether you’d be financially better off returning to work and saving more into your pension.
If you have already taken taxable income from a defined contribution pension, the amount you can pay back in and still get tax relief is restricted. This applies whether you’ve started to draw a regular income from your pension or have taken a taxable lump sum from your pension.
The money purchase annual allowance (MPAA) was introduced in April 2015 at £10,000 before being cut to £4,000 for the 17/18 tax year. It now rises back to £10,000 from 6 April 2023.
This could be good news if you decide to go back to work after retiring. You may be able to pay more back in to improve your financial position for when you give retirement another go.
There are other ways in which you can minimise the impact of the money purchase allowance – like buying an annuity, or cashing in a small pension pot, but these often depend on your specific circumstances, so it’s best to talk to an IFA to find out the most tax-efficient options for you.
For advice on how the changes might affect you, contact one of our advisers at Talis IFA.
site by motley.co.uk