The Budget and your Pensions – an opportunity that you can’t ignore!
I’m sure that you were all glued to your TV sets on Wednesday afternoon, eagerly awaiting the 2023 Budget… and if you weren’t, you missed out! This year’s Budget brought a lot of good news, including expansions to the childcare regime, the retention of energy price caps, and a very welcome prediction that inflation will return to a reasonable level by the end of this year.
But for Financial Advisers, perhaps the most exciting announcements concerned pensions. We feel that the news has been very positive, and offers some tantalising opportunities for our clients – in this note, we’ll highlight the biggest changes, and explain how we can help you benefit from them.
As a reminder, we encourage all of our clients, no matter their age, to consider their pension pots, for the following reasons:
- They are extremely tax-efficient, receiving tax relief both on payments in and income out.
- Putting aside money to be invested is a great way of building up a savings pot to support you in your retirement.
- Pensions are outside your Estate in terms of Inheritance Tax, and so represent a very efficient way to pass your assets onto your loved ones.
The Lifetime Allowance is abolished
The Lifetime Allowance (“LTA”) has long been a complication (or frustration) for savers and their Advisers. Essentially, pensions worth more than the LTA (the most recent value being £1.073m) were subject to a severe 55% tax charge upon the earlier of taking benefits, death, or turning 75. The LTA has shrunk over the years (even more so if we take inflation into account), and as a result more and more people were falling foul of the regime. A lot of savers felt that the LTA was a punishment for saving responsibly for retirement. Many older workers found that there wasn’t much point in contributing further to their pensions, and this provided some with the final push to leave work altogether (especially during the Pandemic). For others, this additional complication added extra layers of stress and confusion, forming a barrier against properly understanding their financial position.
But in the 2023 Budget, it was announced that the LTA will be scrapped. This came as a surprise – many predicted a major increase to the allowance, but no one expected that it would be abolished altogether. The Government hopes that this will encourage people to extend their working careers, as opposed to ‘maxing out’ their pension pot and retiring. It should also avoid punishing those who have worked hard and saved responsibly, and offers a bit more simplification for those who find pension rules obtuse and confusing. Suddenly, millions of people will have an unexpected decision on whether to further grow their pension pots.
There are a couple of caveats. As you may know, you can withdraw up to 25% of your pensions as ‘Tax Free Cash’ (“TFC”), but under this new regime TFC would still be restricted to 25% of the current LTA (i.e. £268,275). So although the 55% tax charge won’t apply, benefits above the current LTA level would still be subject to Income Tax. Also, no Budget is set in stone, and Labour have indicated that they might reinstate the LTA (although what this would look like, or if this will even happen at all, is anyone’s guess).
Annual Allowance increases, and other good news
Another important change is a large jump in the Annual Allowance (“AA”). This is the limit on tax-relievable pension contributions that you can make in a single year, increasing from £40k to £60k. This was an allowance that had remained static for years, but has now jumped by 50%. As a result, high earners will be able to contribute much more – and in combination with the abolishment of the LTA, they can do so without being punished for growing their pension pot too much. For those in the public sector receiving Defined Benefit Schemes, this will further encourage you to stay in work, as the Scheme values will grow at a much higher rate as they are tied to the AA.
Separately, there are a couple of other smaller pension changes. The Money Purchase Annual Allowance (“MPAA”) is increasing from £4k to £10k – this is the limit on contributions for people who have already begun to take a taxable income from their pensions. The threshold for Annual Allowance tapering based on earnings has also risen slightly, both in terms of the level where it kicks in, and the minimum allowance after tapering. As with the rest of the article, this is even more good news for people wanting to maximise their pension contributions, especially high earners.
What we can do for you
The result of all of this is a major opportunity for savers. For those of you nearing the LTA limit who haven’t made contributions in years, and perhaps thought that there would be no point in making any more, you should consider rethinking this. This is a major decision, which could have a major effect on how you structure your retirement pot. We are always there to advise you on this, and can help you decide if this would help you meet your needs and lifestyle objectives.
At the other end of the spectrum, for those who are still making regular pension contributions, there is suddenly a great deal of extra freedom, and the opportunity to make significantly higher annual contributions. As always, there’s a tricky balance between locking money away in your pension (where investments can grow, and you can benefit from generous tax reliefs), and making sure that you have enough liquid assets to support yourself right now. We offer robust cashflow modelling services, so if you’re wondering whether you should be maximising your contributions, we can help you.
If the above sounds like something that could be relevant to you, please let us know. There are few decisions more important than managing your pensions, and we would be delighted to explore how you might be able to benefit from these new opportunities.