The Budget surprise: changes to the pension tax rules
New measures affecting pension allowances announced in the March Budget could mean your retirement planning strategy needs to be reviewed.
If Jeremy Hunt did produce a ‘rabbit-out-the-hat’ in his Spring Budget, it was the announcement of the effective abolition of the pensions lifetime allowance (LTA) from 2023/24. Since 2006, the LTA has been a cornerstone of the pension tax rules, effectively setting a ceiling on the tax efficient value of all your pension benefits.
Lifetime Allowance Changes
In its pre-Budget guise, for most people the LTA was £1,073,100, a figure that was due to be frozen until April 2026. That may sound more than enough, but a 65-year-old non-smoker using that sum for an inflation-proofed annuity would only generate an income of about £45,000 a year (before tax).
In his speech, Mr Hunt made clear that one of the main aims of the abolition was to discourage doctors from retiring early to avoid a pension tax charge. However, the beneficiaries of the change will stretch far beyond the medical profession. The LTA was £1.8 million in 2011/12, but since then has been frequently cut or frozen. Consequently, an increasing number of higher earners have reduced or stopped pension contributions for fear that they too would face a tax charge (at up to 55%) when they drew their benefits.
There were three other pension measures in the Budget:
- The annual allowance, which sets a limit on the tax-efficient total contributions in a tax year, was increased to £60,000, but remains subject to taper rules for the highest earners.
- The money purchase annual allowance, which applies if you have drawn pension income flexibly, was also raised, from a constraining £4,000 to a less restrictive £10,000.
- A new total cash limit of £268,275 will apply on the tax-free pension commencement lump sum, unless they are covered by some form of LTA protection. The strangely specific figure is based on the effective 2022/23 limit -– 25% of the then LTA of £1,073,100.
Mr Hunt’s reforms could offer an opportunity to boost your retirement fund, particularly if you are one of those people forced to halt pension contributions some years ago. Before taking any action, advice is essential as the annual allowance depends on numerous factors. Alas, not all the pension tax traps have disappeared.
The value of your investment and income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.
Occupational pension schemes are regulated by The Pensions Regulator.
Contact us to speak with an adviser.
Fill in the form below and a member of the team will be in touch
A recent report has highlighted the high number and value of Child Trust Funds (CTFs)…
The Budget announced three important changes to childcare provisions in England, but one trap remains.
A new government bill indicates that a change to the automatic enrolment minimum age, and…
The eligibility for some bereavement payments has now been extended to unmarried couples, but there…
The rush to meet the voluntary national insurance contributions (NICs) top-up deadline of 5 April has forced…
New measures affecting pension allowances announced in the March Budget could mean your retirement planning…
New research shows that global dividends have shaken off the impacts of Covid-19 and reverted…
The new tax year starts on 6 April, heralding a raft of changes that will…