4 important Budget pension changes you need to know about

4 important Budget pension changes you need to know about

Investing into one or more pensions while you work is one of the most effective ways of preparing yourself for retirement. Pensions are highly tax-efficient, and a great way of building up wealth to provide you with the lifestyle you want when you decide to stop working.

In March 2023, chancellor Jeremy Hunt announced important changes to pension allowances as part of his spring Budget. These changes were designed to encourage older people to remain in the workplace and the recently retired to return to employment.

If you are approaching, or are at the point of retirement, these changes to pension allowances could affect you. Read on to find out how the March 2023 Budget reformed the Annual, Lifetime, Tapered Annual, and Money Purchase Annual Allowances.

1. You’ll now be able to pay more into your pension each tax year

The Annual Allowance is the amount of tax-relievable pension savings you can accrue each tax year.

In his 2023 spring Budget, the chancellor announced that the Annual Allowance would increase from £40,000 to £60,000 (or 100% of earnings, if lower) in April 2023.

Particularly useful to savers that are looking to put more money aside for their retirement, this increase means that you can accrue significantly more tax-efficient pension savings each year than previously.

Additionally, the ability to carry forward the previous three tax years’ unused allowances was retained.

As an example, if you have a lump sum, you could make a potential tax-relievable contribution of £180,000 to your pension in the 2023/24 tax year (using the Annual Allowance of £40,000 for 2020/21, 2021/22 and 2022/23, and £60,000 for 2023/24).

2. The Lifetime Allowance (LTA) charge has been removed

Before April 2023, the Lifetime Allowance (LTA) for most adults in the UK was £1,073,100. It restricted the amount of tax-efficient savings you could accrue over your lifetime, including both your and your employer’s contributions, plus any tax relief and investment growth.

If you withdrew any funds above the LTA, they would then potentially be subject to a tax charge of 25% for money drawn as income, and 55% for money taken as a lump sum. This was in addition to any Income Tax that was payable.

However, in his spring Budget, the chancellor Jeremy Hunt announced that the LTA tax charge would be scrapped, with the LTA to be abolished entirely in the future.

This means that you can now potentially generate a much larger fund, subject to annual allowances, without having to pay an additional tax charge. This will allow you to accrue more tax-efficient pension savings and potentially ensure a more comfortable lifestyle during retirement.

It’s worth noting that Labour have announced that, should they win the next general election, they plan to reverse this decision.

3. The Tapered Annual Allowance (TAA) was increased, impacting high earners

As part of his spring Budget in March 2023, the chancellor announced that the Tapered Annual Allowance (TAA) would increase from £4,000 to £10,000 in the 2023/24 tax year.

The TAA reduces the Annual Allowance for high earners and restricts the amount of tax-efficient pension savings an individual can make if they have a “threshold income” of £200,000 and “adjusted income” (essentially earnings plus employer pension contributions) of £260,000.

The “adjusted income” was also increased as part of the spring Budget, having previously been £240,000.

This now means that if your adjusted income is more than £260,000, you will lose £1 of Annual Allowance for every £2 you earn over this amount. If you earn more than £360,000, you will be subject to the full TAA and be able to contribute just £10,000 tax-efficiently to your pension.

It’s important to note that the TAA will not apply if you have a threshold income of £200,000 or less.

With calculations often being quite complex, it’s advisable to speak to a financial adviser to receive professional advice and support.

4. The limit imposed on pension contributions after flexible withdrawals was increased

Known as the “Money Purchase Annual Allowance” (MPAA), this mechanism was designed to restrict the amount of tax-efficient pension savings you can make once you have started to flexibly draw from your pension.

Previously this figure was £4,000; however, in his spring Budget, the chancellor increased this to £10,000.

You could trigger the MPAA if you take your entire pension pot as a lump sum, if you buy an investment-linked or flexible annuity where your income could go down, or if you flexibly access your defined contribution pension.

By triggering the MPAA, you would reduce the amount of tax-relievable contributions you could make to just £10,000 a year, compared to the Annual Allowance of £60,000.

For example, this may affect you if you have started to draw from your pension to supplement your income if you are working part-time. However, you might still want to benefit from the employer contributions and tax relief available while you remain employed.

This change will enable you to save more into your pension fund each year, meaning you can potentially have a significant boost to your funds before you decide to give up work entirely.

It’s important to note that the MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

Get in touch

Working with a financial adviser will mean you’re well equipped to plan for your retirement. We can provide you with all the information and advice you need to safeguard your pension pot and guidance on how best to adapt to the changes made by the spring Budget.

So, talk to us by calling 0800 434 6337.

Please note:

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.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.