On 15 March 2023, Jeremy Hunt presented his spring Budget.
That afternoon, you might have read our look at the main announcements. Your spring Budget update – Key news from the chancellor’s statement and All the winners and losers from the 2023 spring Budget outlined the main takeaways.
Now that the dust has settled, you might be wondering what the headline announcements – and especially those relating to pensions – mean for you and your financial planning.
Keep reading to find out.
A shock announcement lifted the cap on lifetime pension savings
Reports in the lead-up to the Budget hinted at a lifting of the Lifetime Allowance (LTA) threshold. In the event, though, Jeremy Hunt chose to scrap the LTA altogether.
Introduced in 2006, the LTA limited the pension withdrawals you could make in your lifetime without becoming liable for a charge. The LTA charge stood at 55% for excess funds taken as a lump sum and 25% for money accessed as income.
While it began at £1.5 million, the limit rose to a peak of £1.8 million before falling to £1,073,100.
Jeremy Hunt used his Budget to scrap the limit entirely, although it’s important to note that it hasn’t been completely abolished… yet.
The LTA remains for the 2023/24 tax year (although the rate of the charge will effectively drop to 0%) before being officially removed in April 2024.
So, what does this change mean for your long-term financial planning and retirement?
Designed to keep high-earners in work, the plan could help you retire early and pass on your wealth tax-efficiently
Scrapping the LTA is part of a wider government plan to keep skilled higher-earners, in particular NHS surgeons and consultants, in work for longer.
It could help you to amass a larger pension fund tax-efficiently. In turn, this might allow you to retire earlier than planned or to keep a larger portion of your pension untouched.
Under current rules, unused pensions can be passed to beneficiaries tax-free in some circumstances, making your pension a really useful estate planning tool.
A final important point to note is that Labour, currently believed to be ahead in the polls, have confirmed that they will look to reintroduce some sort of upper limit if elected to govern.
The Annual Allowance has risen too, increasing the amount you can save tax-efficiently into your pension each year
While the LTA previously restricted tax-free pension withdrawals in your lifetime, the individual pension contributions you make are tax-efficient too.
You receive automatic tax relief at the basic rate of Income Tax on all contributions up to the Annual Allowance. Higher- and additional-rate taxpayers can claim additional relief through their self-assessment tax return.
The Annual Allowance will rise from £40,000 to £60,000 for the 2023/24 tax year.
This means you can save an extra £20,000 into your pension each year, tax-efficiently. But only if the Annual Allowance applies to you.
If you have a lower allowance, you should find that it has also risen post-Budget
If you are a high earner, or if you have already started accessing your pension via certain flexible options, other limits might apply.
The Money Purchase Annual Allowance (MPAA)
Accessing your pension via certain options introduced by Pension Freedoms legislation triggers a lower Annual Allowance known as the MPAA.
Previously, this reduced the tax-efficient contributions you could make each year from £40,000 to just £4,000. From 6 April 2023, this lower limit rises to £10,000.
This is great news if you have started taking a pension but want to continue contributing to another scheme. This could make a huge difference to your plans if you’re considering phased retirement so be sure to get in touch to discuss this with us.
The Tapered Annual Allowance (TAA)
Another allowance, the Tapered Annual Allowance (TAA) is specifically aimed at higher earners and could also limit the tax-efficient pension contributions you make.
The TAA is complicated but effectively reduces your Annual Allowance by £2 for every £1 your income exceeds a specific amount, known as your “adjusted income”.
This reduction previously applied up to a minimum allowance of £4,000. This rises to £10,000 for the 2023/24 tax year.
The maximum pensions taper previously applied when threshold income reached around £312,000. This is now expected to increase to around £360,000.
Get in touch
If you’re concerned about how any of the changes announced in the spring Budget affect your retirement plans, speak to us now. Get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
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.
