Jeremy Hunt used his spring Budget to unleash a raft of changes to pension legislation.
As part of a wider plan to encourage people back into work (and to stay in work for longer), the chancellor has increased the tax efficiency of your pension, helping you to make more tax-efficient contributions and withdraw funds without fear of an additional charge.
The changes could have a huge influence on your retirement planning, making it more attractive to stay in work while also providing the chance for an earlier retirement.
At The Pension Planner, we can help you to understand how the changes affect you and your retirement plans, so get in touch if you have any questions or concerns.
In the meantime, here’s a summary of the main Budget changes.
1. You can now make an additional £20,000 of tax-efficient pension contributions each year
You automatically receive basic-rate tax relief on the pension contributions you make. On top of this 20% relief, as a higher- or additional-rate taxpayer, you can also claim an additional 20% or 25% respectively, through your self-assessment tax return.
This relief exists up to a predetermined limit, known as the “Annual Allowance”.
Before the spring Budget, this limit stood at £40,000 (for the 2022/23 tax year). It has now been increased to £60,000.
The rise effectively gives you an extra £20,000 of tax-efficient contributions that you make in your pension each year.
This could make a huge difference to the size of your pension pot at retirement but it could also affect your budgeting now. We can help you to make the most of this extended allowance.
2. The tax-efficient contributions you can make have increased even if your high earnings trigger the pensions taper
If you are a high earner, you might be affected by the Tapered Annual Allowance (TAA).
The TAA is a mechanism that lowers your Annual Allowance by £2 for every £1 your income exceeds a specific “adjusted income” amount. The calculation is triggered when your earnings exceed a lower “threshold” amount.
While Jeremy Hunt kept the threshold amount the same (at £200,000), he increased the adjusted income amount from £240,000 to £260,000 for the 2023/24 tax year.
This change should lower the number of people caught out by the taper, including many NHS consultants and surgeons who historically have been disproportionately affected. Some even retired early, rather than see the hit to their tax-efficient pension savings.
Not only has the adjusted income level increased, but so too has the minimum reduction. Previously the taper stopped when your allowance reached £4,000. This minimum level has now increased to £10,000.
The Money Purchase Annual Allowance
If you have already started to withdraw from your pensions using one of the flexible options introduced under Pension Freedoms legislation, you might have triggered another oft-forgotten allowance, the Money Purchase Annual Allowance (MPAA).
The MPAA reduced your allowance to £4,000 and this too has increased to £10,000 – great news if you are considering or already in any form of phased retirement.
3. The limit on pension withdrawals has been removed as the Lifetime Allowance is abolished
The Lifetime Allowance (LTA) had previously limited the value of pension withdrawals you could make without becoming liable for an LTA charge. The penalty could be as much as 55% on excess funds taken as a lump sum.
Peaking at £1.8 million, pre-Budget speculation was that Jeremy Hunt was set to re-establish this limit, a significant increase from £1,073,100 (the limit during the 2022/23 tax year).
In reality, the chancellor used his Budget to make a surprise announcement when he confirmed that he was scrapping the LTA altogether.
This change has huge implications for your pension savings, allowing you to save more. You might even find you’re in a position to retire earlier than planned. The change also has implications for your estate planning.
Your pension could be a tax-efficient way to pass on your wealth
Under current rules, you can pass on your unused pension wealth on death in some circumstances. This is because unused pension wealth remains outside of your estate for Inheritance Tax (IHT) purposes.
On death before age 75, the whole of your unused pension pot can pass to your chosen beneficiary tax-free. If death occurs after age 75, your chosen beneficiary will pay tax at the highest rate they pay.
It is worth noting that you can’t use your will to nominate a pension beneficiary; it must be done via an “Expression of Wish” form available from your pension provider. Naming a beneficiary in this way doesn’t guarantee they will receive your funds – the pension trustee will have the ultimate say – but it does make your wishes known.
The spring Budget pension rule changes make it more tax-efficient than ever to save into a pension and to pass on your wealth tax-efficiently.
Get in touch
If you need help revisiting your long-term pension plans in light of the chancellor’s Budget changes, get in touch. Email firstname.lastname@example.org or call 0800 0787 182.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.