LATEST PENSION RULES EXPLAINED
The 2023/24 tax year introduces a fresh set of pension rules that many have labelled as a multi-billion-pound tax giveaway.
Significant changes have been made to key pension allowances, including the Annual Allowance, the Money Purchase Annual Allowance, and the Tapered Annual Allowance. Additionally, some adjustments have been made to the Lifetime Allowance rules.
Who stands to benefit from the pension changes and how?
The changes could have a potentially game-changing impact on high earners, individuals with substantial pension savings, retirees looking to rebuild their savings, and anyone keen on reducing their inheritance tax liability.
In order to take advantage of these new rules, it is advisable to consider contributing to your pension. However, it is crucial to remain aware of certain limitations, as there are numerous caveats and exceptions.
Changes to the Pension Annual Allowance
As of 6th April 2023, the annual allowance has increased from £40,000 to £60,000. This means that, subject to having sufficient earnings, individuals can now contribute up to £60,000 to their pension each year and receive tax relief, which includes any contributions made by employers.
This increase is great news for those looking to substantially boost their pensions, especially for those who have made limited contributions in the past.
Previously, the allowance had been fixed at £40,000, allowing for a government-added tax relief of £8,000 on a £32,000 contribution. With the new limit, one can contribute up to £48,000 and receive £12,000 in tax relief. Higher and additional rate taxpayers may even claim back up to an additional £15,000 via their tax return. (However, high earners may be impacted by the tapered annual allowance, leading to a lower annual allowance for them).
Lifetime Allowance Changes
The lifetime allowance used to be the total amount an individual could accumulate in their pensions without incurring a tax charge. Since 6th April 2023, the tax charge no longer applies. The standard lifetime allowance remains at £1,073,100 for now, but it is set to be entirely removed from 6th April 2024. Currently, it serves as an upper limit to the maximum tax-free amount one can typically withdraw from their pensions starting at age 55, with a limit of £268,275.
Protection and Tax-Free Cash
Individuals with protection against the lifetime allowance are likely entitled to a higher tax-free cash amount.
Enhanced Protection
Members with enhanced protection, including lump sum protection, can access a higher level of tax-free cash. However, the amount will be restricted based on the value of their pension pot as of 5th April 2023.
Fixed Protection
Fixed protection levels (2012, 2014, and 2016) were introduced as the lifetime allowance was reduced over the years. Each protection level sets a maximum tax-free cash amount based on the value of the pension pot at specific dates.
Individual Protection
Individual protection 2016 allows fixing the allowance at the value of the pensions as of 5th April 2016, up to a maximum of £1.25 million. Individual protection 2014 is set at the value of the pension as of 5th April 2014, up to £1.5 million.
Primary Protection
Those with primary protection, along with tax-free cash protection, can determine their maximum tax-free cash amount based on the figures provided in their certificate, which is then increased by 20%.
Potential Loss of Protection
Individuals who applied for protection before 15th March 2023 can make future pension contributions without losing their protection benefits. However, those who applied after that date will lose their protection and increased tax-free cash entitlement if they make future pension contributions.
Tapered Annual Allowance Changes
Previously, the annual allowance would be reduced by £1 for every £2 of adjusted income over £240,000, leading to an annual allowance of £4,000 for those with an adjusted income of £312,000 or more.
As of 6th April 2023, the annual allowance will reduce by £1 for every £2 of adjusted income over £260,000, with a minimum annual allowance of £10,000 for those with an adjusted income of £360,000 or more. This change aims to impact fewer high earners, and those affected can contribute more to their pensions each tax year across all their pensions.
Money Purchase Annual Allowance (MPAA) Changes
The MPAA, first introduced in 2015, limited future contributions to money purchase pensions for those who had flexibly accessed a pension to £4,000 per tax year, without triggering a tax charge.
From 6th April 2023, the MPAA has increased to £10,000, allowing individuals who have accessed their pensions to contribute more to build up their retirement savings. This means they can pay up to £8,000, with the government adding 20% in pension tax relief on top. Higher-rate taxpayers may claim back up to an additional 25%.
How to Contribute to a Pension
For those individuals who are employed, there is a high chance there is a workplace pension in place that they contribute to each year. Before increasing contributions, it's essential to check if the employer matches any additional contributions.
For those whose employer already pays the maximum into their workplace pension or self-employed individuals, opting for a private pension can offer more control over their retirement savings.
Seeking Pension Advice
To gain a deeper understanding of how the lifetime and annual allowance changes apply to individual circumstances, consulting a financial advisor is recommended. They can help review pension and tax situations, advise on increasing contributions, explain the effects on existing pension protections, and suggest ways to mitigate the impact of MPAA or tapered annual allowance. Additionally, they can explore other strategies to save on taxes, such as reducing capital gains tax (CGT).