With the Chancellor of the Exchequer unveiling a significant enhancement to UK pension annual allowances, and scrapping the lifetime allowance altogether in his Spring Budget announcement, we look at the implications, opportunities [and potential prevailing risks] for UK pension holders.
- Removal of the UK pension Lifetime Allowance (LTA), currently £1,073,100, from April 2024.
- Increasing the UK pension contribution annual allowance from £40,000 to £60,000, from 6 April 2023.
- Increasing the UK pension Money Purchase Annual Allowance (MPAA) from £4,000 to £10,000.
- Limiting any initial tax-free cash withdrawal (the ‘Pension Commencement Lump Sum’ (PCLS) from a UK pension to 25% of the current Lifetime Allowance; £268,275, barring any applicable protections.
- Increasing the income threshold for the tapered annual allowance from £240,000 to £260,000.
In a ground-breaking budget move for pensions, Chancellor Jeremy Hunt decided to increase the pension contribution annual allowance and remove the UK pension lifetime allowance altogether, providing relief to individuals whose pension planning has been hindered by years of tax changes and threshold reductions.
This progressive change aims to counteract the previous discouragement, faced by higher earners, to save for their pensions, and is specifically intended to stem the premature retirement of senior NHS professionals, which has resulted from the current punitive taxation of their pension funds in excess of the LTA.
UK Pensions Lifetime Allowance (LTA)
The budget represents a significant opportunity for individuals who are close to breaching, or indeed have already exceeded, the LTA threshold. The changes announced by the Chancellor not only provide greater flexibility for pension savers in respect of their UK pension schemes, but also simplifies the process for all UK tax residents.
The LTA charge will be removed from 6 April 2023, and the LTA itself will be abolished from April 2024. The move has been broadly well-received, given that the LTA effectively taxed investment growth and was arguably unnecessary, given the application of an annual allowance. The budget effectively removes the LTA charge of 25% on any regular pension withdrawals (from the amount held in excess of the LTA), and 55% on any lump sum withdrawals (from that excess).
The UK Pension Annual Allowance
From 6 April 2023 the UK pension annual allowance will increase from £40,000 to £60,000.
The annual pension contribution limit, which determines the maximum amount an individual can contribute while still receiving tax relief, has undergone numerous adjustments over the years. Initially set at £255,000 in 2010/11, it was significantly lowered to £50,000, before being reduced to its current limit of £40,000 in 2014/15.
Due to wage rises, an increasing number of individuals each year have found themselves exceeding this allowance, as evidenced by over 41,000 self-assessment tax returns reporting a breach in 2020/21.
This new allowance limit of £60,000 per annum now presents an opportunity, for those who had previously limited their pension contributions, to enhance their retirement savings.
Initial tax-free cash withdrawal (the ‘Pension Commencement Lump Sum’ (PCLS)
Effective from 6 April 2023, the limit set on the amount of cash that can be taken from a UK pension, tax free, will be fixed at 25% of the current Lifetime Allowance (LTA), effectively £268,275 (unless specific protections secured by an individual, grant them a higher threshold).
Tapered and Money Purchase Annual Allowances
The intricacies of the money purchase annual allowance (MPAA) and tapered annual allowance have previously resulted in additional complexity and reductions to individuals’ pension contribution allowances, reducing them to as low as £4,000 per year. However, the UK government’s resolution to make a return to work more appealing has resulted in the Chancellor raising these limits to £10,000, commencing 6 April 2023.
Previously, the restrictive £4,000 barrier impeded those seeking to re-establish their pension after prior access, but the forthcoming increase to £10,000 will, from next month, offer greater flexibility and opportunity to re-engage with their career and make additional contributions to their pension funds.
Tapered annual allowances have previously represented a challenge for high-income earners. Since 2020, individuals with an adjusted income exceeding £240,000 and a threshold income in excess of £200,000 faced a reduced annual allowance, meaning that they effectively lost £1 of their annual allowance for every £2 earned above £240,000 (down to a minimum of just £4,000). Effective from 6th April 2023, the Spring Budget adjusts the income threshold triggering the tapered annual allowance from £240,000 to £260,000, and simultaneously increases the minimum tapered amount to £10,000.
A window of opportunity – but potentially closing with every passing day
These numerous and far-reaching changes to the UK pension regime represent a significant opportunity for those looking to maximise their pension savings.
Each individual needs to fully understand these changes in the context of their own circumstances – and act upon them as quickly as possible.
If, for example, you have already breached the LTA, or are close to doing so, then the Chancellor of the Exchequer’s Spring Budget announcement should be very welcome news… however, less than 24 hours after Hunt’s speech, Shadow Chancellor Rachel Reeves announced that Labour will bring back the LTA if they win the next general election.
So if Labour’s current 22% lead in the polls does indeed translate into victory at the next election (which must be held before 28 January 2025) then the window of opportunity is potentially not only narrow, but is closing with every passing day.
If you’re not currently a Forth Capital client, but want to maximise your pension benefits and to put a robust plan in place [for your retirement and for your beneficiaries] before the LTA is potentially reinstated, then book a free initial consultation with one of our advisors today.