What does the Spring Budget mean for your pension?
On Wednesday 15th March, Chancellor Jeremy Hunt delivered his Spring Budget, which included the biggest shake-up in the taxation of pensions for over a decade. The Lifetime Allowance is being abolished altogether and the Annual Allowance is being increased by 50%.
In simple terms, these changes will enable people to save more before they get hit with a tax charge.
What are the Lifetime and Annual Allowance?
The Lifetime Allowance sets the total value of all the pension savings you can build up before having to pay extra tax. It currently stands at £1.073 million and had been expected to stay at that level until 2026, but from April 2023 it’ll be a thing of the past.
It’s important to note that the tax-free cash allowance remains limited to 25% of the now abolished Lifetime Allowance limit of £1.073 million unless you have a higher protected Lifetime Allowance limit.
The Annual Allowance limits the amount you can pay into your pensions in a tax year without having to pay an additional tax charge. It’s being increased from £40,000 to £60,000.
There’s a third limit, the Money Purchase Annual Allowance, which limits how much you can pay into your defined contribution pensions in a situation where you’ve already started taking some of benefits from them. It’s going up from £4,000 to £10,000.
Sounds good… but will it affect you?
The Lifetime Allowance and Annual Allowance were only expected to be a factor for a minority of people. Most UK pension savers weren’t likely to hit the Lifetime Allowance and don’t typically use up their full Annual Allowance each year.
Part of the reason for the change is to discourage higher earners from retiring early simply to avoid additional tax charges. NHS doctors are a widely publicised example. Many reports suggest doctors are retiring or reducing their hours purely because of the impact the current Lifetime Allowance has on their tax situation. The change is intended to encourage people in that position to stay in work longer, which should benefit our economy and public services.
The changes are therefore good news for you if you’ve got substantial pension savings and you’re concerned that, in time, you could exceed the Lifetime Allowance. You now no longer need to worry that you may have to pay that additional tax charge when you retire.
They’re also good news if you’re looking to boost your pension savings, either by increasing how much you regularly save or by making any large one-off payments into your pension, perhaps because your income is inconsistent, or you’ve come into some money from a dividend or inheritance. The increased Annual Allowance will enable you to put more into your pension without a tax penalty.
In the case of high earners who recently retired and were over the Lifetime Allowance, they can’t "unretire" to claim back the additional tax bill, but there will be no reassessment at age 75 against the Lifetime Allowance, so no additional charges will be applied
What about the State Pension?
Every year the State Pension is reviewed to take account of inflation, and new figures are announced. From April 2023, payments will be:
- £203.85 a week (up from £185.15) for the full, new flat-rate State Pension (for those who reached State Pension age after April 2016)
- £156.20 a week (up from £141.85) for the full, old Basic State Pension (for those who reached State Pension age before April 2016)
As ever, if you’re making decisions about your financial future, we recommend getting independent help and advice. MoneyHelper is an excellent place to start. It can also help you to find an authorised independent financial adviser (IFA) in your area.