Pension changes – what do they really mean for you?

Jeremy Hunt’s Budget last month brought in a host of pension changes, many of which kick in at the beginning of this tax year.

For some people, these will have profound implications on how they manage their retirement plans and income, although the detail of exactly how everything will work has not yet been shared.

Here’s everything we know so far, together with some suggestions on how those in different circumstances may be affected.

Headline changes from April

The new tax year brings many changes to pensions, which will affect different people depending on their circumstances.

From April 6:

  • The Lifetime Allowance charge on pensions decreases to 0%.
  • The pension Annual Allowance increases to £60,000.
  • The Money Purchase Annual Allowance will return to £10,000 from £4,000.
  • The amount of tax-free cash you can take as a lump sum from your pension will be capped at a quarter of the 22/23 Lifetime Allowance level, so you will only be allowed to take £268,275 from your pension tax-free, whatever its size unless you have other protections in place on your pension.
  • The adjusted income level that is required for a tapered annual.

The Lifetime Allowance (LTA)

What is happening?

The Lifetime Allowance is the amount you are allowed to have in your pension without paying a penalty. It has been reduced in recent years and stood at £1,073,100 until April 5 this year.

If you took your pension out before this time and it was over that amount you would pay a punitive rate of tax on it - 55% if you took it as a lump sum, and 25% if you took it any other way, for example, cash withdrawals.

However, the charge has now been reduced to 0%, so your pension can be as big as you wish without you paying the charge. The charge will be removed altogether by the finance bill in April next year.

Why is it happening?

The Government is concerned that the Lifetime Allowance was disincentivising people, particularly the over 50s, from going to work. It was a particular problem in the NHS, where some doctors had very large pensions and were worried about going over the allowance amount.

According to the Government’s announcement on the measure it “supports individuals’ ability to build up retirement savings and so improves the financial incentive of work whilst continuing to balance the cost of pensions tax relief”.1

Who will it affect?

If you have a large pension and were worried about going over the threshold, this is not currently a concern and makes pensions even more valuable as a savings vehicle that you can pass down the generations free of inheritance tax.

There are a few potential stings in the tail though – the first is the freezing of the tax-free lump sum (see below), but the more serious is the potential for the LTA decision to be reversed by a Labour government that has already pledged to do this if it comes to power in the next election.2

What you can do

See a financial adviser if you think you will be affected by this change, and they can help you to make the right decisions. It can be particularly complicated if you have a final salary pension scheme, as the value of your pension is less easy to work out as an individual.

The Annual Allowance

What is happening?

At the same time as abolishing the Lifetime Allowance, the Government is making it easier to save more into your pension by increasing the annual allowance – the amount you can put into a pension each year and claim tax relief - from £40,000 to £60,000.

You can also use any unused allowances from three previous tax years, meaning you could deposit £40,000 for the three previous tax years and £60,000 for this year if you have enough money to do so.

Why is this happening?

This is also part of the Government’s plan to incentivise older people to work and to continue saving for their retirement.

Who will it affect?

Those who want to make larger contributions to their pensions at the end of their working lives, or the self-employed who often make ‘lumpy’ pension contributions when they sell a business, will find they can make greater contributions to pensions, and this can be valuable given the tax relief available.

What you can do

If you have regularly come up against the Annual Allowance in your pension contributions before you can plan to make larger contributions from this tax year.

The Money Purchase Annual Allowance

What is happening?

The Money Purchase Annual Allowance is the amount you can continue to put into a pension each year and still gain pension tax relief after you have already accessed your defined contribution pension.

It had been reduced to £4,000, and is now increasing again to £10,000.

Why is this happening?

Again, this is part of the Government’s plan to get people back to work. Many over 50s have already flexibly accessed their pension and the £4,000 limit may be a disincentive to working, so increasing the allowance means they can benefit from more tax relief.

What you can do

If you have already flexibly accessed your pension but have income elsewhere, this is good news as you can gain tax relief on it and continue saving it for later in life. It may be worth speaking to a financial adviser before taking advantage of the changes.

Increase in the adjusted income level

What is happening?

At present, if you earn over £200,000, the amount you can put into your pension and gain tax relief could be reduced in a tapered manner.

This will still happen, but the amount you can earn before tapering kicks in will rise, and the amount of the annual pension allowance you will still keep will rise too.

At present anyone with Adjusted Income (a figure that includes total income plus the value of employer contributions minus some specific deductions) over £240,000 will see their annual allowance taper down. This will now kick in at £260,000, and the minimum allowance for high earners will be £10,000 rather than £4,000.

Why is this happening?

Again this is to incentivise higher earners to keep working and taking advantage of pension tax breaks.

What you can do

Check whether you will be affected. If you are you may be able to up pension contributions in the coming year.

17th April 2023