Spring Budget: key pension updates
The recent Budget announcement unveiled significant changes to the UK pensions landscape, offering a wealth of opportunities for clients who may have previously faced limitations or been entirely precluded from benefitting from further pension savings.
We outline the key pension updates below, explore the new prospects these changes introduce and present case studies to illustrate how these opportunities can be effectively harnessed in real-world scenarios.
1. Removal of the Lifetime Allowance
From April 2023, the Lifetime Allowance tax charge will be removed, with the Lifetime Allowance being completely abolished from April 2024, allowing for greater tax-free growth potential in pension funds.
How would this impact me?
If you previously had concerns about reaching or exceeding the Lifetime Allowance, you can now invest in your pension without fear of attracting tax charges, enabling you to grow your pension pot tax-free and potentially secure a more comfortable retirement.
Pensions also come with significant legacy benefits, for example usually not being subject to Inheritance Tax. Removal of the Lifetime Allowance means more of your pension could be passed on to your family.
Case study
Sara, a successful business owner, had already reached the previous Lifetime Allowance of £1,073,100 and therefore stopped contributing to her pension. With the removal of the limit, we can help Sara reassess her long-term investment strategy and explore the impact of contributing again, enabling her to continue growing her pension pot tax-free without any limit, and benefiting from valuable tax relief on contributions.
2. Increase in Annual Allowance from £40,000 to £60,000
The Annual Allowance has been increased, providing more scope for tax-efficient pension contributions.
How would this impact me?
If you were contributing close to or at the previous Annual Allowance limit, you now have the opportunity to increase your contributions to benefit from greater tax relief and build a more substantial pension pot for your retirement.
Case study
Rajesh, a 55-year-old management consultant earning £250,000 a year, is aiming to retire at 60. His current pension is £550,000, which through our cash flow modelling we have shown will not be sufficient to provide his desired income in retirement. With the increase in Annual Allowance, we can help Rajesh make the most of his last years in employment and build a pot which will allow him to meet his retirement goals.
3. Tapered Annual Allowance increased from £4,000 to £10,000
The minimum tapered Annual Allowance has been increased which allows high earners subject to tapering to make larger tax-relieved pension contributions.
How would this impact me?
If you were previously subject to tapering, you can now contribute more to your pension while still benefiting from tax relief, which can help boost your retirement savings.
Case study
Michael, a partner at a law firm, had previously been subject to tapering which reduced his Annual Allowance to £4,000. With the new minimum of £10,000, we advise he increase his pension contributions to benefit from the additional tax relief and boost his retirement savings. Alongside ISAs, Michael is now able to save £30,000 a year in tax-efficient investments helping him build a bigger, and more tax efficient, retirement pot.
4. Increase in Adjusted Income Threshold from £240,000 to £260,000
The adjusted income threshold has been raised, meaning fewer high earners will be affected by the tapering of their Annual Allowance. Together with the increased allowances, the earnings level at which savers are fully impacted by tapering has increased to £360,000 (from £312,000).
How would this impact me?
If your adjusted income is between £240,000 and £360,000, this change may allow you to make larger tax-efficient pension contributions, enhancing your retirement planning. Our table below shows the potential increases available to you.
*New allowance from 6th April 2023
Case study
Louise, a media director, earns £312,000 a year. For the last few years, her Annual Allowance has been limited to only £4,000, making it difficult to build a pension pot for her future. Following the changes, Louise now has a significantly increased allowance of £34,000. We can work with Louise, to help build this new opportunity into her long-term retirement plan and show the impact this will have on her future income.
5. Money purchase Annual Allowance increased from £4,000 to £10,000
The money purchase Annual Allowance has been raised, offering greater flexibility for those who wish to continue making pension contributions after accessing their pension benefits.
How would this impact me?
If you have already accessed your pension benefits, this change allows you to contribute more to your pension. The changes allow greater flexibility for those aiming for a hybrid retirement, perhaps working part-time or in consultancy roles.
Case study
Lucas, a part-time accountant, supplemented his income with pension funds after partially retiring in 2018. Recently, he took on more work and no longer needed the extra income. Thanks to the increased allowance, Lucas can now replenish his drawn retirement funds and secure a stronger financial position for future pension needs.
6. Tax-free cash capped at £268,275
(i.e. 25% of the current Lifetime Allowance of £1,073,100)
The amount of tax-free cash that can be taken from your pension has been capped at 25% of the current Lifetime Allowance of £1,073,100 – unless previous pension protections are in place.
How would this impact me?
You will not accrue any tax-free cash on pension savings above £1,073,100. This may reduce the tax efficiency of pension income, and impact how you draw your pension benefits in future.
If you have protections in place, these will allow significantly enhanced tax-free cash to be taken. Protection can still be lost prior to the end of the 2022/23 tax year, so no contributions should be made until after 6th April 2023 in order to retain these.
Case study
Niall, a software engineer, is approaching £1,073,100 in a pension and does not know whether to continue contributing to his pension. Working with Niall, we are able to model his future income strategy, and show the value of continuing to make contributions to his pension – even without generating more tax-free cash.
7. Removal of Pension Protection restrictions
Under previous rules, those with Enhanced or Fixed Protection were restricted from making further pension contributions. From 6th April 2023, those previously impacted will be able to accrue new pension benefits without losing this protection.
How would this impact me?
If you have had to stop contributions in order to maintain your pension protection, you may now be able to restart these. Many have had to give up on further pension savings, but with the removal of the Lifetime Allowance, and the ability to maintain higher tax-free cash entitlements, this valuable long-term investment may again be an option.
Case study
Amina, a high earning architect, has Fixed Protection 2014 in place which provided a protected Lifetime Allowance of £1.5m, and tax-free cash of £375,000. To maintain this protection, Amina has not been able to make any further savings to a pension scheme since 2014. Following the changes, Amina is now able to start contributing to a pension again, while maintaining her increased tax-free cash entitlement.
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