ATTIVO

Spring Budget 2023: how does this impact your pension allowances?

Earlier this year, Jeremy Hunt laid out his plans to get the UK economy back on track and begin to keep inflation under control. A large focus was for economic growth; particularly in getting people back to work, including early retirees. With changes made to pension allowances and lifetime allowance changes, we explain how these changes could impact you below.

Key pension changes from the 2023 Spring Budget:

The pension annual allowance will increase from £40,000 to £60,000
The money purchase annual allowance will increase from £4,000 to £10,000
The lifetime allowance will be removed entirely

Pension Annual Allowance

The pension annual allowance is the total annual amount you can save into your pension plans before you must pay an additional tax charge. This includes payments from you, your employer and any third party. Previously, it was either £40,000 or your total earnings – whichever is lower. But, since 6th April 2023, it’s now up to a maximum of £60,000.

Lifetime Allowance Changes

The lifetime allowance is the total amount you could build up in all your pension savings in your lifetime without facing a tax charge when it comes to taking them. If your pension savings were worth more, you would previously have had to pay a tax charge on anything over the allowance, which is known as the ‘excess’.

The lifetime allowance prior to the 5th of April was £1,073,100, and we were told in the 2021 Spring Budget that it would stay there until 2026. However, the Chancellor announced within the spring budget that the lifetime allowance was to be removed completely, and no one will face a lifetime allowance tax charge from 6 April 2023. The lifetime allowance will be completely scrapped by 6th April 2024, meaning there will be no cap on how much you can build up in pension benefits while continuing to get tax relief.

What do the Lifetime Allowance Changes mean for me?

It’s good news if you were finding yourself close to or already impacted by the previous allowance. It now means you can give your pension savings a boost without worrying about paying any extra tax. Or, if you were planning to take your pension money soon but found you were over the previous allowance, you might now avoid up to 55% in tax charges.

For most people however, the amount you can take as your tax-free cash entitlement (Pension Commencement Lump Sum) will stay at 25% of the previous lifetime allowance limit of £1,073,100 or 25% of the value of their pension benefit; whichever is the lower.

Money Purchase Annual Allowance

Usually, if you start to take benefits from defined contribution pensions, or, simply put, a pension pot, the amount you can pay back in and still get tax relief on reduces drastically. This is designed to prevent people from earning tax relief twice, which comes at a cost to the Government.

This limit, known as the ‘money purchase annual allowance’, which currently stands at £10,000 a year, increased from £4,000 at the introduction of the recent tax year (6th April 2023). This allowance will apply when you’ve started to draw an income from your pension via a drawdown plan or take a taxable lump sum from your pension. It is not enforced if you solely access your 25% Tax Free Cash entitlement from your previously un-accessed pension pots, also known as Uncrystallised Pension Funds.

Individuals that benefit the most from the changes and the opportunity for Attivo clients

Both changes to the annual allowance and lifetime allowance are part of incentives to keep people working longer and to encourage individuals who had taken early retirement back into work to benefit from being able to increase their overall pension savings.

For our Attivo clients, it will enable them to further bolster their retirement savings. Working with their lifestyle financial planner, it gives a greater opportunity to achieve their lifestyle retirement goals.

It is not financial advice or a recommendation and should not be considered as such. If you choose to invest, please remember the value of investments and any income derived from them can fall as well as rise and you may get back less than you put in.