Jeremy Hunt’s spring Budget has introduced a raft of changes when it comes to pensions. These alterations are set to kick in from the start of the new tax year on April 6, 2023. But what are the pension changes, and how do they affect Britons?
Annual Allowance
The first key change for Britons to note is the alteration to the annual allowance – the total amount people can save tax-free into their pension each year.
Back in 2010/11, this was at a high of £255,000, but over the years it has been eroded to £40,000 today.
Chancellor Jeremy Hunt, however, took decisive action to reverse this trend, announcing an increase to £60,000 from April 6 onwards.
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Tom Selby, head of retirement policy at AJ Bell, explained what this could mean for pension savers.
He said: “Pensions ‘carry forward’ rules allow you to use unused allowances from up to the three prior tax years in the current tax year, provided you were a member of a pension scheme in the tax year you are carrying forward from and you don’t exceed 100 percent of your annual earnings.
“In theory, it means someone could pay in as much as £180,000 to their pension next year.”
Mr Selby stressed the carry forward rules could be useful for those trying to make up for lost time saving for retirement.
Lifetime Allowance
Mr Hunt pulled a “rabbit out of the hat” in his Budget according to experts, when he announced the Lifetime Allowance (LTA) would be scrapped altogether.
The LTA put a limit on the amount a person could save over their lifetime while still benefitting from tax relief.
If exceeded, Britons would have to pay 55 percent tax, which led to many high earning professionals including doctors leaving their roles to avoid the penalty.
In efforts to lure over 50s back into the workforce, the LTA will reduce to zero percent from April, ahead of it being abolished altogether through future legislation.
As part of that reform, the maximum tax-free cash people can build up will be capped at £268,275.
In doing so, the Chancellor has effectively increased by 50 percent the amount a person can pay into their pension.
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Mr Selby continued: “The fear of breaching the LTA will have discouraged some people from adding to their pension or taking investment risks in line with their long-term retirement strategy, so scrapping the LTA should now give people the confidence to supercharge their retirement savings.
“In the short-term, it is crucial anyone at risk of breaching their LTA through a ‘benefit crystallisation event’ – such as taking tax-free cash, entering drawdown or buying an annuity – waits until April 6 to do this if they possibly can. This is because they could still face an LTA charge before April 6, whereas from April 6 onwards there will be no LTA charge.”
Money Purchase Annual Allowance
The third change relates to the MPAA, which applies to anyone who flexibly accessed taxable income from their pension.
Once the MPAA is triggered, it means a person’s annual allowance is reduced, and it removes the ability to carry forward unused annual allowances from the three previous tax years.
Previously, the MPAA was £4,000, however, Mr Hunt has confirmed this will rise to £10,000 – its original level – from April 6.
Tapered annual allowance
The final change to bear in mind for pensions in April is an alteration to the tapered annual allowance.
At present, this is triggered by higher-earners who have ‘threshold’ income above £200,000 and ‘adjusted’ income above £240,000.
Mr Selby explained: “For every £2 of adjusted income above £240,000, the annual allowance of high-income savers reduces by £1, to a minimum of £4,000 for those with adjusted income of £312,000 or more.
“From April that ‘adjusted income’ threshold will rise to £260,000 and the minimum tapered annual allowance will increase to £10,000.
“This should mean fewer high earners are caught by the taper and the impact should be lower.”
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