Changes to pension policy, including pensions allowances, taxes and thresholds, impact how you plan for retirement as well as how far you can stretch your money when you reach it.
In the Spring Budget, chancellor Jeremy Hunt announced he wasn’t increasing the pension lifetime allowance - which was widely expected - but scrapping it altogether, in an effort to incentivise more people to remain in work for longer.
That wasn’t the only positive pension-related announcement in the Budget though. We explain the various pension changes so you can understand how they’ll shape your retirement journey. We’ve also pointed out some ways to take advantage of the changes. Here’s what you need to know.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Increased annual pensions allowances
The pension annual allowance increased from £40,000 to £60,000, which will allow workers to increase their pension contributions without having to worry about tax.
The annual allowance is the maximum amount – including employee and employer contributions - that can be paid into a pension pot without incurring a tax bill.
“Raising the pension annual allowance to £60,000 could help many people build up their retirement nest eggs, especially if they are playing catch-up owing to missing contributions in earlier years due to affordability or gaps in employment,” says Rob Morgan, chief investment analyst at Charles Stanley.
“For those whose earnings vary greatly from year to year, it offers more scope to up-size contributions and better plan for retirement.”
Additionally, workers will still be able to use carry-forward rules, so from this year they will be able to pay in £60,000 as well as up to £40,000 from the last three years (depending on whether they made pension contributions in previous years), giving a potential total of £180,000.
Take advantage of pension allowances to reduce your tax burden
The big increase in the annual allowance opens up a new avenue for those looking to minimise their tax burden – especially as fiscal drag pushes more and more people into higher tax bands.
The new £60,000 allowance should help protect your pension investments from capital gains tax and income tax as they’re “wrapped inside a tax shelter”, says Laith Khalaf, head of investment analysis at AJ Bell. “The sooner you put your investments inside… the pension, the sooner the protection kicks in.”
Income tax has been frozen until 2028, and increasing your pension contributions could be a way to stop you from creeping into a higher tax band.
This could be particularly beneficial for higher earners with an annual income above £125,140 who face 45% income tax and no personal allowance. “Where you are employed, it may be worth exploring any tax-free or tax-advantaged benefits in kind that may be available via salary sacrifice to help reduce your taxable income down,” says Mark Collins, head of tax at Handelsbanken Wealth and Asset Management.
Lifetime allowance cap scrapped…
From 6 April, workers no longer face a cap on the amount they can save for retirement without being taxed. Breaching the lifetime allowance (LTA) - which is £1,073,100 - previously triggered a 55% tax charge.
“This change is well overdue as our figures show the lifetime allowance would now be worth £2.3 million if it had risen with inflation since its introduction in 2006,” says Alice Guy, head of pensions and savings at Interactive Investor.
“It was surprisingly easy to breach the old LTA limit, especially after a long working life with regular pension investing,” continues Guy. “Someone starting work at 20 and saving £500 per month until they reach retirement age at 68 could see their pension pot reach an amazing £1.2 million as even modest pension savings add up over time.”
The new lifetime allowance rules should allow doctors and public sector workers to continue working, rather than retiring early to avoid being hit with the LTA charge.
… But the tax-free lump sum remains capped
There was a “sneaky cut to the pension tax-free lump sum” hidden in the Budget, says Guy.
The sum you can take out of your pension without being taxed will be capped at £268,275, or 25% of the lifetime allowance limit of £1,073,100.
“This is a change to previous rules which allowed pension savers to withdraw 25% of their total pension pot tax-free,” says Guy. What’s more, this amount will be frozen so inflation will eat away at it.
Money Purchase Annual Allowance cap increased
The money purchase annual allowance (MPAA) cap has increased to £10,000 yearly from £4,000 before.
This is the amount that can be saved into a pension once it has been accessed from age 55. Many people have unknowingly incurred a tax bill due to this allowance as they access their pension pot, particularly throughout the cost of living crisis.
This change will benefit higher earners and basic-rate taxpayers alike. “With life expectancies rising more of us will need to finance a long retirement and higher pension allowance and money purchase allowances will give pension savers the ability to save more,” says Guy.
Tapered annual allowance changes
Previously those earning over £240,000 a year saw their annual allowance fall from £40,000 to £4,000.
But this has now been increased, from £4,000 to £10,000. The adjusted income threshold is also rising from £240,000 to £260,000.
“This is a significant increase to the annual allowance, which will particularly help those in defined benefit schemes with long service who get a promotion, as well as those whose earnings fluctuate,” says Andrew Tully, technical director at Canada Life.
“As a policy clearly designed to encourage public sector employees to remain in work – primarily those in the NHS – it will be interesting to see how effective this change will be. Come what may, many higher-paid workers will benefit from this boost to the allowance.”
-
Should you sell in May this year?The market adage looks unlikely to apply in 2024, and global equities are proving resilient
-
Should you invest in UK equities?The FTSE 100 hit a record high this week, but UK equities remain unloved and undervalued compared to their global and US peers. Should you snap them up at a discount?
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings accountUlster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
-
Moneybox raises market-leading cash ISA to 5%Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
-
October NS&I Premium Bonds winners - check now to see what you wonNS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
-
October’s NS&I Premium Bond winners revealed - have you scooped £1 million?Two lucky NS&I Premium Bond winners are now millionaires this October. Find out here you are one of them
-
Bank of Baroda closes doors to UK retail bankingAfter almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
-
The best options to earn cashback on spendingFrom credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend.
-
Should you retire abroad?Check the regulations governing pension savings carefully before you decide to retire abroad.
-
John Lewis mulls buy now, pay later schemeThe CEO of John Lewis has said the retailer will consider introducing buy now, pay later initiatives for lower-priced items.
