Metis AM
In his spring Budget, chancellor Jeremy Hunt announced several updates to pension rules for the 2023/24 tax year. Some of the changes had been widely anticipated, while others were more unexpected.
The intention behind the reforms was to encourage more high earners to stay in work for longer. By removing certain tax charges and increasing pension allowances, the chancellor hoped that more people – particularly senior doctors in the NHS – would want to continue contributing to their pension for longer or increase existing contributions.
So how have the changes affected pension savers’ behaviour in the four months since the start of the new tax year, and what could it mean for you?
The chancellor made a raft of changes to pension rules that came into force in April 2023
To recap, here is a list of the changes relating to pensions that were announced in the Budget.
1. The tax charge for exceeding the Lifetime Allowance has been removed
One of the biggest changes to be announced was the removal of the tax charge for exceeding the Lifetime Allowance (LTA) in 2023/24, with the LTA expected to be abolished entirely in 2024.
In previous tax years, if your pension pot exceeded the LTA of £1,073,100, you faced a tax charge of 55% when withdrawing a lump sum from your pot. For funds drawn as income, you’d face 25% tax on top of any Income Tax you paid.
From April 2023, this charge was removed, so even if your pension exceeds the LTA, you won’t face the additional tax charge.
There are a couple of important things to note regarding the removal of the LTA tax charge.
- The Pension Commencement Lump Sum – the amount that you can withdraw from your pension tax-free – has been capped at 25% of the LTA. So, the maximum amount that you can withdraw tax-free from your pension in 2023/24 will remain at £268,275, even if you have more than £1,073,100 in your pot.
- Remember that the LTA hasn’t yet been abolished, and Labour has said that if the party comes into power, they will likely reverse this change. So, it’s important to consult with your financial planner on a regular basis to stay abreast of any changes to the rules.
2. Annual Allowance increased to £60,000
The Annual Allowance is the amount that you can contribute to your pension tax-efficiently each tax year. In 2023/24, this was increased from £40,000 to £60,000.
If you are a higher- or additional-rate taxpayer, you can claim 40% or 45% tax relief on your contributions, respectively, allowing you to deposit more into your pension pot at no extra cost to you. Being able to contribute more to your pension means you can benefit from even more tax relief too.
3. Money Purchase Annual Allowance increased to £10,000
The Money Purchase Annual Allowance (MPAA) is usually triggered if you contribute more into your pension after you have already started to take a flexible income from it. Once triggered, it reduces the amount that you contribute tax-efficiently to your pension each tax year.
In 2022/23, the MPAA was £4,000, but the chancellor increased this to £10,000 for 2023/24. This has made it easier for you to build up your pension pot further after returning to work, even if you had already started to draw a flexible income from it.
If you contribute more than £10,000 to your pension after triggering the MPAA, you could be issued a tax charge.
4. Minimum Tapered Annual Allowance increased to £10,000
In 2023/24, the chancellor increased the minimum Tapered Annual Allowance from £4,000 to £10,000. The adjusted income threshold for the Tapered Annual Allowance increased from £240,000 to £260,000.
This means that if you are subject to the Tapered Annual Allowance, you may be able to contribute more to your pension tax-efficiently than you could previously.
The pension reforms have already changed how lots of people save for retirement
Figures reported by FTAdviser have shed light on the impact that the pension reforms have already had on pension contributions and retirement plans, in particular the removal of the LTA tax charge. The report shared figures from a survey of 1,070 UK adults, including 146 higher-rate taxpayers, which took place between 16 and 19 June 2023.
According to the report, 59% of higher-rate taxpayers have taken action as a result of the reforms.
More than half (51%) of the higher-rate taxpayers in the survey said they had changed how they contribute to their pension, either restarting, increasing, or planning to increase contributions. This includes 16% who had previously stopped contributing to their pension to avoid exceeding the LTA.
Those who have increased their pension contributions are depositing an additional £650 a month into their pot.
Now that they can save more into their pension, 23% of the people surveyed said they have delayed their retirement plans, or are planning to delay them, so that they can build up a bigger pension pot. Around 10% said they had come out of retirement for the same reason.
A financial planner can help you to make the right choice for you
There’s no doubt that the chancellor’s pension reforms have already had a significant effect on lots of people who are saving for or already in retirement.
But pension saving remains a complex area to navigate, particularly when it comes to tax rules and reliefs.
If you’re considering changing your pension contributions or retirement plan as a result of the reforms, it’s sensible to consult with your financial planner before making any decisions. They can help you to examine the options available to you and select the most suitable next steps based on your circumstances and goals.
Get in touch
If you’d like to learn more about how the chancellor’s pension reforms might affect you and your retirement plans, we can help. Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
