Chancellor Announces Pension Tax Changes – Lifetime Allowance, Annual Pension Allowance & More

It has been confirmed in the Spring Budget that the lifetime limit on tax-free pension savings will be removed, the annual pension allowance will be increased and both the Money Purchase Annual Allowance (MPAA) and Minimum Tapered Annual Allowance (MTAA) will also rise.

The changes that have been outlined by the Government form part of its initiative to keep people working longer or get people back into work.

Chancellor scraps lifetime pension allowance

The news that the Chancellor was abolishing the lifetime allowance on pension pots came as a surprise to many. In fact, experts predicted that the allowance would be increased to £1,800,000.

Under the current rules, the lifetime allowance, which was first introduced in April 2006 and applies to all pensions, limits the total amount someone can save in their pension without having to pay additional tax costs. These costs are based on the total value of all the pensions a person has used in their lifetime and passed on after their death.

Since its introduction, the lifetime allowance amount has changed numerous times, before reaching its current level in 2020.

It was previously announced that the lifetime allowance would remain at £1,073,100 up to and including the 2025/26 tax year, but this limit has now been removed altogether.

It is hoped that workers will now start to, recommence, or increase their pension savings, assuming they can afford to.

According to His Majesty’s Treasury, the charge will be removed from 6 April 2023, but the limit on the Pension Commencement Lump Sum (PCLS) will remain at its current maximum of 25% of the current lifetime allowance rules, equivalent to £268,275, or 25% of the fund value if lower. However, those individuals who already have a protected right to take a higher PCLS will continue to be able to do so.

Annual Allowances (AA)

The AA is the maximum amount of pension savings an individual can make each year with tax relief without incurring a tax charge which aims to effectively recoup some of the tax relief given.  The Chancellor confirmed during the Budget that the annual tax-free pension allowance will rise from £40,000 to £60,000 from 6 April 2023.

The Budget estimated that roughly 80% of NHS doctors will not receive a tax charge in respect of accruals as per the 2015 NHS career average scheme. The rules in relation to carrying forward unused annual allowances from the three previous tax years will remain the same.

Also, the Money Purchase Annual Allowance (MPAA), a reduction to the AA for individuals who have flexibly accessed their money purchase pension savings, will rise from £4,000 to £10,000 from 6 April 2023.

This same increase also applies to the Tapered AA which is a reduction to the AA for individuals with income above set levels.

The adjusted income threshold for the tapered AA will also rise from £240,000 to £260,000 as of next month.

Comment

The announcements may provide scope for people to make additional pension contributions, although these should only be made if affordable and access is not required until at least the normal minimum pension age.

For those already using their pension to provide an income in retirement, the new rules may result in a lower tax liability. However, pensions do still provide other tax advantages, including an effective vehicle for inheritance tax planning, especially if other assets can be used to generate an income in retirement.

Therefore, when considering the new announcements alongside the existing rules, it is always advisable to seek financial advice before making any changes.

A financial adviser has the technical knowledge and expertise to consider all the options, the advantages, and any implications for your own specific personal situation.