How will the Spring Budget impact pensions?
Jeremy Hunt delivered his first budget as Chancellor of the Exchequer on 15th March, announcing key changes to pension legislation for the 2023/24 tax year.
Changes to Pension Lifetime Allowance
The headline measure was the change Pension Lifetime Allowance. Currently, the Lifetime Allowance stands at £1.0731m, this is the total amount of pension savings you can build up without incurring a tax charge over your lifetime.
If you exceed this figure, tax is charged at 25% if this excess is drawn as income, and 55% if this is taken as a lump sum.
From 6th April 2023 the Pension Lifetime Allowance charge will be reduced to 0%, with the government intending to potentially scrap this Lifetime Allowance altogether. This will dramatically simplify pension savings for many people with assets close to the Lifetime Allowance amount.
As part of these changes the maximum tax-free cash lump sum individuals can continue to draw will be a quarter of the current Lifetime Allowance, which equates to £268,275.
Changes to Annual Allowances
The Chancellor has also announced key changes to the Pension Annual Allowance. The Annual Allowance currently stands at £40,000 or 100% of earnings. This allowance is to be increased to £60,000 or 100% of earnings, whichever id the greater.
Whilst this will not affect the majority of the UK tax paying population, it does impact high earners and those who are more able to contribute larger sums into their pension savings. Increasing the Pension Annual Allowance is a move by the government towards simplifying pensions, making them appealing and attractive to the working population and is hoping to entice higher earners back to work or to stay in employment longer.
Along with the Pension Annual Allowance, the Chancellor has also increased the Money Purchase Annual Allowance which currently stands at £4000 to £10,000. The Money Purchase Annual Allowance is generally triggered for those who have accessed their pensions flexibly, and their Annual Allowance is reduced from £40,000 to £4,000. From the 6th April 2023 this will increase to £10,000 per year.
These significant changes made by the Chancellor in the Spring Budget have come under immediate scrutiny from opposition parties and already there have been rumours circulating that potential new Governments could well reverse these changes.
However, it is important to plan your finances based on current legislation and not hold off on making important financial decisions.
Your Ellis Bates Financial Adviser can guide you through any impact the Spring Budget may have had on your pension. If you are not currently an Ellis Bates client and are looking to review your pension in light of the Spring Budget, please do get in contact with us for an initial discussion on your particular circumstances.