March budget – key changes for pensions
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 into their pensions 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 2024 it is expected to become a thing of the past. From April 2023, no extra tax will be payable if you build up pension savings over the Lifetime Allowance.
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 is being increased from £40,000 to £60,000.
There is 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 have already started taking some of benefits from them. It is 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 were not likely to hit the Lifetime Allowance and do not typically use up their full Annual Allowance each year.
The Government has suggested that 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. Some reports suggested that doctors were retiring or reducing their hours purely because of the impact the Lifetime Allowance had on their tax situation.
The changes are therefore good news for you if you have substantial pension savings and you are 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 are also good news if you are 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 have 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.
The changes do not help high earners who had retired before April 2023.