Jeremy Hunt has made some significant changes to pensions in his spring budget yesterday. The changes bring the wind back into the sales of high earners who’ve pulled away from contributing somewhat so as not to exceed lifetime allowance. The changes are below:
Lifetime Allowance
The lifetime allowance itself is set to be abolished from April 2024, in the meantime the lifetime allowance charge will be removed from 6 April 2023 meaning no-one will incur the charge. This will be welcomed by many who see this allowance as a tax on investment growth and unnecessary in a regime where there is already an annual allowance in play.
The upper limit on the tax free cash someone can take from their pensions is being capped at 25% of the current LTA (£268,275) from 6 April 2023 unless you have protections that entitle you to a higher level, but this remains a significant benefit.
Tapered Annual Allowance
Since 2020, anyone with an adjusted income of over £240,000 per year and threshold income of more than £200,000 has seen their annual allowance squeezed. For every £2 they earn over £240,000, they lose £1 of their annual allowance down to a minimum of just £4,000. In today’s announcement the adjusted income level required for the tapered annual allowance to apply to an individual increases from £240,000 to £260,000 on 6 April 2023 and the minimum amount they can be tapered to will increase to £10,000.
Money Purchase Annual Allowance
The money purchase annual allowance (MPAA) and tapered annual allowance are significant complicating factors that can restrict people’s pension contributions to as low as £4,000 per year. Again, the government’s decision to increase these to £10,000 from 6 April 2023 will be welcomed.
The government’s drive to encourage older people back into the workforce could be significantly boosted by a reform of the MPAA. The current restriction of £4,000 was a significant obstacle for people looking to rebuild their pension after having previously accessed it – the boost to £10,000 will give people significantly more headroom.
Annual Allowance
The annual allowance will increase from £40,000 to £60,000 from 6 April 2023.
This is the maximum amount someone can contribute to a pension each year while still receiving tax relief. This allowance has also suffered lots of tinkering over the years.
In 2010/11 it stood at £255,000 before being reduced to £50,000, and then again to its current level of £40,000 – it’s been here since 2014/15. However, as wages have climbed we’ve seen more and more people breaching the allowance – over 41,000 declared a breach in their self-assessment tax returns for 2020/21.
People who might have limited contributions to their pensions for several years now face the prospect of being able to significantly boost their retirement wealth.
To ensure you are maximising your pension allowances, talk to one of our FCA authorised wealth managers by arranging a Discovery Call [Here]
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