Chancellor Jeremy Hunt unveiled the government’s Budget today, which outlined its plans for spending and revenue raising from the next tax year and beyond. There were some significant changes to pensions announced, which could have an impact on the way you plan for retirement.
Pensions annual allowance raised
The pension annual allowance is the amount of money you can put into your pension in a single tax year. For the current tax year – which ends on Wednesday 5 April – that allowance is £40,000 or 100% of your salary, whichever is lower. In today’s Budget, Jeremy Hunt has announced that the maximum level will rise – from £40,000 to £60,000 from the start of the new tax year – 6 April 2023.
Over the years, pension allowances have shrunk both in nominal terms and ‘real’ terms, when adjusted for inflation. These rules are in place to limit the cost of pension tax relief on the Treasury, but as the cost of living has soared there’s a friction between how much people can accumulate in their pensions and what they will actually need to live comfortably in later life.
People often max out their annual allowance towards the end of their careers when they need to bump up their retirement pot and make up for years of less than ideal contributions. Raising the annual allowance to £60,000 can help people do this and may also provide an incentive for some higher rate taxpayers to stay in the workforce.
Pensions: The Lifetime Allowance scrapped (‘LTA’)
The Lifetime Allowance was the maximum amount of money you could draw from your pensions (both workplace and personal) in your lifetime without paying extra tax. For the current tax year (2022/23), this limit was set at £1,073,100.
But the Lifetime Allowance has been controversial as good investment performance can push a pension over the limit, even if an individual has kept their contributions within their annual allowance. For some, it has also been a deterrent to remaining in the workforce later in life and continuing to build a pot for retirement, and abolishing the LTA removes this potential barrier.
In today’s Budget, Chancellor Jeremy Hunt has scrapped the pension Lifetime Allowance. The Lifetime Allowance charge, which was the 25% tax charge that would apply to pensions that exceed the LTA limit, will be scrapped from April 2023, before the LTA is completely abolished from April 2024.
Pensions: The Money Purchase Annual Allowance (‘MPAA’)
Pensions are awash with jargon and quirks in the rules, many of which are poorly understood by the public at large. These changes put the spotlight on the Money Purchase Annual Allowance, which limits how much some people can contribute to a pension after they have started to take payments from their pension.
Each person has an annual allowance for how much they can contribute tax-efficiently to their pension each tax year, but for those who’ve ‘triggered’ the MPAA the amount drops. That means people are limited in how much more they can build for retirement.
For the current tax year, 2022/23, the MPAA is just £4,000, but from 6 April 2023 and the start of the new tax year, the MPAA will more than double to £10,000.
The MPAA is designed to prevent people from gaming pensions rules by getting tax relief on their pension contributions, withdrawing money and then putting it back into their pension to receive tax relief again. When this is planned and done deliberately, it’s called ‘pension recycling’, but it’s also fair to say the rules around triggering the MPAA are complex and not well understood.
The high cost of living has waylaid even the best-laid retirement plans and some people have taken more from their pension pots than intended. The increase in the MPAA will help those who want to continue working and building up their pension.
It’s vital that people understand exactly how they can withdraw from their pensions tax-efficiently so they don’t trigger the MPAA without realising.
It’s best to get help from a qualified financial adviser before drawing income from your pension. A financial adviser will be able to look your individual circumstances and consider the potential implications.
At Nutmeg, our team can provide information about the things you may want to consider when it comes to your retirement planning as well as providing restricted financial advice about accessing your pension. You can book a call with a member of the team to discuss your retirement options today.
Source: Spring Budget 2023.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice. This is general information on tax for information purposes and is not tax advice. JPMorgan and Nutmeg do not provide tax advice and persons should check their own tax position prior to taking any action.