In his first spring budget since becoming Chancellor of the Exchequer last Autumn, Jeremy Hunt has announced today (15th March 2023) a number of significant changes to pension allowances designed to encourage people aged over 50 to remain in work rather than take early retirement.
A summary of these changes are as follows:
- Lifetime allowance to be abolished from the start of the new tax year (6th April 2023)
- Yearly pension allowance to rise from £40,000 to £60,000
- Reforms to both the Money Purchase Annual Allowance (MPAA) and Minimum Tapered Annual Allowance (MTAA)
Lifetime Pension Allowance (LTA)
Currently capped at £1,073,100, the LTA is the maximum amount someone can accumulate across all pension plans during their lifetime without incurring additional tax levies (on the amount above the allowance).
Originally introduced in 2006 by the Labour Government, the allowance was initially set at £1.5 million, rising to £1.8 million in 2012. This has since been reduced to its current level of £1,073,100 where it was due to remain frozen until 2026, before today’s announcement for it to be completely removed.
Up to now the rate of additional tax incurred on amounts within pension funds over the LTA have been dependent upon how these funds were paid out. If received as a lump sum the rate is 55% and 25% if paid as regular payments or cash withdrawals.
The Treasury has stated that all tax charges will cease from the next tax year commencing from 6th April 2023 and the allowance will be fully abolished by April 2024.
This change only applies to the lifetime allowance and not the tax-free cash lump sum you can take out when you reach your retirement age, which for personal pensions remains at 25% of the value of the fund. So, up to a maximum of £268,275 (£1,073,100 x 25%).
Yearly pension allowances
The other big change announced today is an increase to the amount you are allowed to put into your private pension fund on an annual basis without incurring any tax charges. The annual allowance currently stands at £40,000 and is set to be increased by 50% to £60,000 from the next tax year (6th April 2023 – 5th April 2024).
The annual allowance is the total amount you can contribute across all private pension funds in any one year and still receive full tax relief, based on your marginal rate of income tax, on those contributions. The allowance applies to anyone who contributes to either a defined contribution (also known as money purchase) or defined benefit scheme.
Money Purchase Annual Allowance (MPAA) and Minimum Tapered Annual Allowance (MTAA)
The Chancellor also confirmed there will be reforms to the MPAA and MTAA, with both allowances increasing from their current level of £4,000 to £10,000 from the next tax year.
The MPAA is the allowance which replaces the annual allowance once you commence taking benefits from your pension fund and is designed to prevent people from benefiting from tax relief on pension contributions they continue to make should they continue to work in some capacity after retirement.
The MTAA is a reduction of the annual allowance applied to anyone contributing to a private pension who earns in excess of £240,000 per year. Increases in both these allowances will allow for more of your pension savings to receive tax-relief.
If you’d like to know more about how these changes announced in the budget could impact your retirement plans, get in touch and we’ll arrange for a pensions advisor we work with to contact you to discuss further.