This article is from the Good Guide to Financial Planning, which you can download free here.
Chancellor Jeremy Hunt made major changes to how pension savings work when he set out his latest Spring Budget. Higher and additional rate taxpayers will be able to put more money into their pensions and receive marginal tax relief, but it is not only the wealthy who will benefit from the changes.
The extra annual allowance will help you if you need to bolster your pension pot ahead of retirement. The Spring Budget changes give rise to a number of points to consider. You could be affected if you:
1. Want to pay more into your pension
The new rules mean that most taxpayers can now contribute up to £60,000 a year if your earnings allow. You can also only receive tax relief up to 100 per cent of your annual earnings.
2. Have a pension which exceeds or is close to £1,073,100 – the standard lifetime allowance
If you have a sizable fund, the removal of the lifetime allowance charge from 6 April 2023 means that you can pay more into your pension and not have to pay the tax charge if you go over the allowance threshold.
3. Wanted to take a tax-free lump sum from your pension
The maximum pension commencement lump sum (known widely as the tax-free lump sum) will be frozen at £268,275 – 25 per cent of the current standard lifetime allowance.
4. Have taken taxable income from your pension but returned or continued to work
The increase of the money purchase annual allowance (MPAA) from £4,000 to £10,000 means that you are now able to save more money into your pension free of tax. When you do decide to retire, this could increase the value of your pension significantly. The MPAA is triggered when you withdraw taxable income from a defined contribution pension scheme, not including any tax-free lump sums you are entitled to.
5. Want to benefit from employer contributions
You may have opted out of a workplace pension scheme and taken a cash alternative if you were previously close to breaching the lifetime allowance. With the changes, it could be beneficial for you to start paying into a pension again and take advantage of contributions from your employer.
6. Are considering retiring within the next few years
The changes significantly raise the ceiling on what can be put aside for retirement. You might now be able to bring your retirement date forward, taking advantage of the removal of the lifetime allowance charge to give your pension savings a boost and save more.
7. Previously obtained lifetime allowance protection
Reviewing your past lifetime allowance protections could provide you with more flexibility when retiring or making further contributions. If you hold certain lifetime allowance protections, the amount of tax-free lump sum you can take may be higher. The amount you are entitled to depends on the lifetime allowance protection that you hold.
8. Are due to inherit a pension
The pension changes took effect on 6 April 2023 and will be finalised once the Finance Bill passes through the Commons and Lords (within seven months). Deferring the payment of the pension death benefits could therefore reduce the amount of tax you may need to pay.
9. Are above the threshold for the new 30 hours free childcare
Parents who hit the £100,000 earnings threshold will be hit with a crippling effective tax hit once the new free childcare hours scheme comes in. Increasing your pension payments could bring you back under that crucial threshold.
10. Have pension death benefits written into a trust
Pensions that have designated a trust to receive benefits on your death might result in unnecessary tax charge during the 2023/24 tax year.