A good retirement plan is one that adapts to a changing financial landscape. When legislation changes, rethinking your plan could help you continue building your savings in the most efficient way. Ultimately, this means you may be more likely to secure the lifestyle you want when you retire.
So, whether you are still building up your fund, or you have already retired, reviewing your plan in light of the latest developments can ensure you make the most of any opportunities that are available.
The 2023 spring Budget included some significant changes to pensions. And, depending on what stage of your retirement planning you are at, you may be affected in different ways. Understanding what the changes mean for you can help you make more informed decisions about your financial plan.
Read on to learn what the key changes are and what they might mean for you.
3 key pension changes in the spring Budget
1. Annual Allowance increased to £60,000
The Annual Allowance is the amount you can accrue in your pension, including employer contributions, in a single tax year while still receiving tax relief on your contributions.
On 6 April, this increased from £40,000 to £60,000 (or 100% of your earnings, whichever is lower). This potentially increases the amount you can contribute to your pension each year without facing tax charges.
You can also carry forward any unused Annual Allowance from the previous three tax years.
The increased AA means you may be able to contribute up to £20,000 more than you could in the 2022/2023 tax year before facing tax charges.
However, if you are a high earner, you may be affected by the Tapered Annual Allowance.
The Tapered Annual Allowance (TAA) comes into effect if your earnings and employer pension contributions exceed £260,000. This is known as your “adjusted income”. Once the TAA is triggered, your Annual Allowance will be reduced by £1 for every £2 that you exceed the threshold.
Fortunately, the minimum amount your allowance can taper to was increased from £4,000 to £10,000 on 6 April 2023. The threshold at which it is triggered was also increased from £240,000 to £260,000.
This means that if you were previously affected by the TAA, you may now be able to contribute more to your pension before facing tax charges.
2. Lifetime Allowance effectively abolished
The Lifetime Allowance (LTA) is the total amount of tax-efficient pension savings you can accrue in your lifetime. This includes your own contributions, employer contributions, investment returns, and tax relief.
In the 2022/2023 tax year, the threshold was set at £1,073,100 and you would have likely faced tax charges when withdrawing anything above this amount.
However, the tax charge for exceeding the allowance was removed on 6 April 2023 and there are plans to abolish the LTA altogether in the future.
Without the LTA in place, you will have the opportunity to accrue a significantly larger retirement fund, without having to worry about additional tax charges when you come to draw from your pension. This could mean you benefit from a more comfortable lifestyle in retirement.
It’s useful to note that, even though the LTA has effectively been abolished, you will still only be able to draw a maximum tax-free lump sum (sometimes called a “pension commencement lump sum (PCLS)”) of £268,175.
You may want to consider increasing your retirement contributions to take advantage of the change to the LTA now, particularly as Labour have publicly stated they will reverse the decision to abolish it if they are in government after the next election. Although it is worth remembering that if they are elected, their overall pension strategy may have changed by that time.
3. Money Purchase Annual Allowance increased to £10,000
The Money Purchase Annual Allowance (MPAA) is triggered once you start drawing flexibly from a defined contribution (DC) pension. It potentially limits the tax relief you can receive if you contribute to your pension after you start drawing from it.
This may affect you if you are still earning an income from work, but have drawn some money from your pension. It may also be triggered if you take a lump sum from your pension pot.
The good news is, the MPAA increased from £4,000 to £10,000 on 6 April to encourage more people to return to, or remain in, work. There are some excellent benefits to staying in work, including increased income in retirement, more social interaction, and more structure in your life.
The increased MPAA means that, if you do continue to work so you can reap these benefits, you can top-up your pension savings, even if you are either drawing from your fund to supplement your earnings or you have flexibly drawn money in the past.
However, you may still face a tax charge in some cases, so it is important that you understand exactly when the MPAA will be triggered.
Research from Canada Life found that just 4% of over-55s knew exactly how the MPAA works. So, if you are considering a move back into work after retiring, it may be useful to take some professional advice to ensure that you do not get caught out by the MPAA.
Get in touch
If you have questions about changes in the spring Budget or any other aspect of your retirement planning, we are here to help.
Email email@example.com or call 0113 262 1242 to find out more.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.