In last week’s Spring Budget 2023 announcement, Jeremy Hunt outlined his strategies for regaining control of the UK economy and inflation today. He made it abundantly apparent that the goal of his statement was economic growth, and that putting people back to work, including early retirees, was a key component of his growth strategy. He consequently made some significant adjustments to pension allowances. Here is how those changes might affect you.
Key pension changes from the Spring Budget for 2023:
- The yearly pension limit will rise to £60,000 from £40,000.
- The annual money purchase allowance will rise to £10,000 from £4,000.
- We’ll revise the tapering annual allowance.
- There will be no more lifetime allowance.
How have my pension allowances changed?
Changes to the annual pension allowance
The entire amount you can contribute to your pension plans each year before incurring additional tax is known as the pension annual allowance. Included in this are any payments made by you, your employer, or any third party. Depending on which is lower, it was either £40,000 or your total income. Nevertheless, it will now increase to a maximum of £60,000 from April 6, 2023.
Changes to the annual money purchase allowance
Your allowance may be reduced if you withdraw any taxable funds from your pension plan, whether through a drawdown arrangement or by cashing out your pension savings. Once you start cashing out or withdrawing money from your pension, your ability to contribute to your plan will typically drop from £40,000 to £4,000. Otherwise known as the money purchase annual allowance.
This will increase from £4,000 to £10,000, the Chancellor revealed, making it simpler for you to continue working and saving after you’ve taken money out of your savings, if you choose to. Anyone who delved into their pension plan to supplement their income during the pandemic or while costs are so high may find this to be especially helpful.
Changes to the Tapered annual allowance
If you’re a higher earner then you might have been impacted by an allowance known as the tapered annual allowance. According to your salary, this gradually lowers the amount you can contribute to your pension plan each tax year. There would be no reduction in your limit below £4,000. This lower limit will be increased to £10,000 in the new tax year.
Changes to the LIFETIME ALLOWANCE
The lifetime allowance is the total amount that can be accrued in all pension contributions over the course of a person’s lifetime without subjecting them to a tax penalty when the time comes to receive them. If your pension savings are worth more, you will be responsible for paying taxes on the excess (also known as the “excess”) of what is allowed.
We were informed in the 2021 Spring Budget that the lifetime allowance will remain at £1,073,100 until 2026. The lifetime allowance, however, will be totally eliminated starting on 6 April 2023, according to the Chancellor’s announcement today.
If you were on the verge of or already affected by the prior allowance, this is wonderful news for you. It means that you can increase your pension funds without having to worry about accruing more taxes. A tax charge of up to 55% may now be avoided if you were about to take your pension money shortly but discovered you were over the old allowance.
Remember that for the majority of people, the amount you are eligible to receive tax-free will remain at 25% of the old lifetime allowance cap of £1,073,100.
Will I be impacted by the pension reforms in the Spring Budget?
The careful selection of the Chancellor’s pension adjustments will make it more desirable for people to continue working longer or to leave retirement. So, they will primarily affect people who are in or near retirement.
The changes will probably be welcomed if you want to continue working and contributing to your pension plan for a little while longer. This is something you might wish to do in order to plan for a more pleasant retirement or because working helps you stay up with escalating expenses.
But keep in mind that the main focus of today’s Budget changes to pensions is to enable people to contribute more to their plans. So, the ones who can truly take advantage of these new allowances—those with greater wages or larger pension plans—are more likely to profit from the changes.
However, if you’re still early in your career, don’t have any immediate intentions to use your pension savings, or are now earning less than average, you probably won’t see much of a difference in the near future.
What impact will these changes have on my private or workplace pension?
You can effectively contribute more to your pension plan at a lower cost because of the tax advantages it offers. Thus, if you can, maximise these benefits while your pension allowances are larger to help grow your retirement funds.
Also, if you have a workplace pension, it gives you the opportunity to fully benefit from auto-enrolment and the boost your employer’s contributions provide. For people who previously had a £4,000 cap but yet wanted to continue working and contribute more to their pension plans, this may have been especially difficult.
Overall, everyone gets the same result: you can now save more for the future because of the tremendous tax benefits that your pension plan provides.
Interested in making the most of the new pension changes?
Contact us to review your existing pensions and more importantly, to learn how to make the most of them.
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