At the Spring Budget 2023, the Chancellor Jeremy Hunt announced a huge pack of measures related to pensions. Since the pandemic, much has been made about people who fall within the 50+ age bracket and their working habits. According to the ONS as of March 2023, the UK unemployment rate was estimated at 3.7%. As well as this, UK economic inactivity (people unemployed not seeking immediate employment) was estimated at 21.3%.
With this in mind, the government have openly prioritised getting people of all ages back into work, especially older people. A recent Lords Committee report found economic inactivity has increased by 565,000 people since the start of the pandemic. The majority of over 50s who’ve left the workforce since the pandemic neither want nor expect to return to work. This is of course heavily impacting an already fragile labour shortage in the workforce. The revamp to pensions was a key indicator that the government is desperate to get early-retirees back to work. It also shows why they think it’s important to discourage those thinking of retiring early.
With all this in mind, we lay out the facts behind the overhaul to pensions, and the impact this will have on you…
How Have Pension Allowances Changed?
Pension annual allowance changes
The annual allowance refers to the total amount you can save into your pension plans each year. This is before an additional tax charge is due. The annual allowances can include payments from yourself, your employer and any third party. The cap stood at £40,000, with it now rising to a maximum of £60,000 from 6th April 2023.
Lifetime allowance changes
The other headline announcement in pensions was to do with the Lifetime Allowance (LTA). The lifetime allowance refers to the total amount you can add to your pension pot without facing a tax charge when accessing. Known as the ‘excess’, if your pension savings are worth more, you’ll need to pay a tax charge if exceeded.
The LTA previously stood at £1,073,100, with it not expecting to change until 2026. However, the Chancellor announced that the lifetime allowance will be scrapped entirely. What’s more, any lifetime allowance tax charges are also scrapped from 6th April 2023.
Money purchase annual allowance changes
In your pension plan, should you have access to any taxable money you may see your allowance decrease. This can either be through a drawdown arrangement or from cashing in your pension savings. The amount you can save into your plan will usually reduce from £40,000 to £4,000. This is known as the money purchase annual allowance.
In the Spring Budget, the Chancellor announced that this rise from £4,000 to £10,000. This allows it to be simpler for those still in work and saving to take out money from their pensions pot before they officially retire. This may help the vast majority who accessed their pension savings to support themselves or their family during the pandemic or afterwards.
Tapered annual allowance changes
For those who are a higher earner (earning over £100,000 a year) tapered annual allowance may have affected you. Once your savings hit £200,000, the amount you can save in your pension pot gradually reduces each tax year depending on your earnings. Your allowance won’t reduce to any lower than £4,000. The Chancellor announced that the lower limit will be increased to £10,000 in the new tax year beginning 6th April 2023.
Who Will The Pension Changes Affect?
The long and short of it, the pension changes will affect everyone who has a pension savings plan. However, this measure was definitely intended to appeal to those 50 years and above who have either retired early or are thinking of retiring early. If you’d like to continue working and paying into your pension plan for longer, then these changes are likely to be met positively. Likewise, those on higher salaries or larger pension pots, are more likely to benefit from the changes.
For those who only have a workplace pension, it provides an advantage with auto-enrolment as well as the increase from employer’s payments. For those who were affected by the £4,000 limit that still wanted to continue working whilst saving, this is also likely to be met positively.
Nordens’ Tax Manager, Adam Truluck, believes, “All these changes are more than welcome as they give taxpayers much more opportunity to invest in their future. The removal of the lifetime allowance will be especially beneficial for doctors who have struggled with this for several years. Hopefully this is the start of much more positive changes to come. Taxpayers have the ability to use these new allowances to do more effective tax planning whilst investing in their future.”
We hope this has outlined to you the new changes to the pensions as per the Spring Budget announcements. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.