Before The Chancellor Jeremy Hunt announced his plans during the March Spring Budget, there were various rumours circulating prior that there would be an increase to both the annual allowance and lifetime allowance.
What took the country by surprise, more than a lettuce lasting longer than Liz Truss in parliament, was not only the removal of the lifetime allowance charge, but the declaration of the abolishment of the lifetime allowance.
The decision has been made in order to encourage people to stay in work longer, but is there a catch?
There’s a lot to take in, so we asked Paul Darley, Managing Director for our partners at Wealth Experts, to explain more about the new changes to pensions, and share his opinion on whether they’ll have their desired effect and drive to get people back to work. Or, is there more to it than what let on?
Take it away passionate about pensions Paul (That’s his nickname in the office)
As I’m sure most were, I was quite surprised to see that the lifetime allowance has been totally abolished. It might seem like a positive outcome, but it has thrown various items into the mix. So, it’s important that you’re armed with all of the details, and how you can ensure your pension planning isn’t affected by the new changes.
Lifetime Allowance explained
The lifetime allowance, to put it simply, is the total amount of pension benefits you can build up in your lifetime in a pension scheme before you need to pay a tax charge. The standard lifetime allowance was £1,073,100, and any pension benefits that were above this, are taxed at the appropriate rate.
The 6 April is now an important date not only for the new tax year, but for pensions too! The 6 April 2023 marked the removal of the charge, and 6 April 2024 will see the abolishment of the lifetime allowance.
Why has the decision been made?
It’s been alluded to that the reasoning behind scrapping the lifetime allowance was because of highly skilled workers, such as Doctors in the NHS, were choosing to leave their position, as they were accumulating a large pension pot, and paying tax on the excess.
Now that the limit has been eradicated, the Government are hoping that this will incentivise and encourage workers, especially medical professionals, to stay in employment for longer. Furthermore, it’s a drive to get more people to pay into a pension, to help save for retirement.
Those who currently pay into a pension can now save as much as they like, with no higher tax rates for up to 55% for breaching the limit.
The annual allowance is the gross amount that you can pay into a pension each year and receive tax relief. The limit was £40,000, but there will now be an increase to £60,000. Again, the reasoning for this move is to motivate those to save towards retirement, and to reduce the amount that Doctors in particular are paying on an annual allowance charge, incentivising them to continue working.
Tapered annual allowance
The tapered annual allowance puts limits on the amount of tax relief you are eligible for on your pension contributions.
The tapered allowance was a reduction from £40,000 to £4000 for those with an income between £240,000 and £312,000.
Following the changes, the new tapered allowance is £10,000, and the taper will start for those who earn between £260,000 and £360,000.
It’s suggested that this change in particular is targeted at high earning doctors, as another way of convincing them to stay in employment and continue to contribute to a pension.
Money purchases and annual allowance charges
The Money Purchase Allowance is a separate allowance, which restricts how much a person who has flexibly accessed their Defined Contribution pensions can contribute. This currently sits at £4,000 but yes, you guessed it, it’s also changing! The allowance has now been increased to £10,000 (as of 6th April 2023).
The decision to increase the limit of Money Purchase Allowance was made as a bid to try and encourage those who are accessing their pensions early to continue to stay in work. For those who have retired, the agreement is to try and motivate them back into the work place.
This change should see more people want to pay into a pension, and not limit those who have a flexible income from saving into a pension in the near future. An individual’s circumstances of course will change every now and then, so it is welcoming that the Government are acknowledging this and trying to accommodate where possible.
So, is there a catch?
It’s fair to say that we don’t think anyone was expecting these huge changes to pensions. To answer the question of if there is a catch, the overall feeling is that these amendments are positive, and although the number one driving factor is to encourage high-earners back to work – retired or not, it does allow for you to build up a significant amount of wealth in preparation for your retirement.
Being devil’s advocate, it’s not unusual for government or tax legislation to change. Depending on if Labour win the next general election, they have already made it quite apparent that they will remove the abolishment of the lifetime allowance, so I won’t be surprised if these changes are challenged, modified or eliminated if there is a change in administration.
A penny for your thoughts (and pension)
If the changes highlighted have got you thinking about your pension planning, our patient, proficient pension team are here to help. You can speak to one of our friendly team members, and we’ll set up a meeting with a specialist advisor.