Pension allowance changes: What do you need to know

During the 2023 Spring Budget, the UK Government announced significant changes to how tax-free pension savings work.

The Budget focused primarily on economic growth, with an emphasis on motivating people to get back into work, particularly early retirees.

In response to this, the Chancellor declared major changes to pension allowances, hoping to encourage high-earners to remain in the workforce for longer.

Key pension changes from the Spring Budget 2023:

• Pension Annual Allowances set to increase from £40,000 to £60,000

• Lifetime Allowance to be removed completely

• Money Purchase Annual Allowance set to increase from £4,000 to £10,000

• Tapered Annual Allowance to be updated

Pension Lifetime Allowance

Lifetime Allowance (LTA) represents the total amount you can accumulate in all your pension savings throughout your life without incurring a tax charge when accessing them.

If your pension savings exceed the amount, you will be required to pay a tax charge on the surplus value, which is referred to as the “excess”.

The limit of £1,073,100 was set to last until 2026. However, the Chancellor announced the allowance would be scrapped completely.

The current allowance applies to private pensions and not the state pension.

The new change will come into effect from 6 April 2023 with the initial abolition of the LTA charge, before the allowance is scrapped entirely in the following year.

Pension Annual Allowance

The Pension Annual Allowance refers to the maximum amount an individual can contribute to their private pension each tax year without facing additional charges.

Currently, the limit is set at £40,000. The Chancellor announced that this would rise by 50 per cent to £60,000, starting on 6 April 2023.

Money Purchase Annual Allowance

Changes are also being made to theMoney Purchase Annual Allowance.

This allowance is relevant for individuals who have begun to withdraw from their defined contribution pension, but who want to continue working and saving.

At present, the allowance stands at £4,000 per year before incurring a tax penalty. However, the Chancellor has more than doubled this amount to £10,000 and is effective from 6 April 2023.

This change could be useful for those who dipped into their pension to help subsidise their incoming during the pandemic or the cost-of-living crisis.

Tapered Annual Allowance

For higher earners, the tapered annual allowance may have affected their pension savings. 

This allowance gradually decreases the amount you can contribute to your pension plan each tax year, based on your earnings.

The allowance would not be reduced to below £4,000. However, in the upcoming tax year, this lower limit will be raised to £10,000.

The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 from 6 April 2023.

The Spring Budget introduced noteworthy pension changes aimed at motivating older individuals to remain in or re-enter the workforce.

The changes have the potential to impact a significant portion of the population. However, the exact number of people who will benefit remains uncertain.

Need advice on your pension contributions? Get in touch with our team today.

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