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Pensions
March 15, 2023
4 mins read
- Articles
- Spring Budget 2023: the changes that affect your pension allowances
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Today, Jeremy Hunt set out his plans to get the UK economy back on track and get inflation under control. He made it clear that the focus of his announcement was economic growth, and a big part of his growth plan was to get people back to work – including early retirees. As a result, he made some major changes to pension allowances. Here’s how those changes could impact you.
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Key pension changes from the 2023 Spring Budget:
- The pension annual allowance will increase from £40,000 to £60,000
- The money purchase annual allowance will increase from £4,000 to £10,000
- The tapered annual allowance will be updated
- The lifetime allowance will be removed entirely
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How have my pension allowances changed?
Pension annual allowance changes
The pension annual allowance is the total amount you can save into your pension plans each year before you have to pay an additional tax charge. This includes payments from you, your employer and any third party. It was either £40,000 or your total earnings – whichever is lower. But it’s now going up to a maximum of £60,000 on 6 April 2023.
Money purchase annual allowance changes
If you access any taxable money from your pension plan - either through a drawdown arrangement or from cashing in your pension savings - then you may see your allowance reduce. 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.
Today, the Chancellor announced that this will go up from £4,000 to £10,000 – making it easier for you to keep working and saving once you’ve taken money from your savings, if you want to.
This might be particularly useful for anyone who dipped into their pension plan to help top up their income during the pandemic or while costs are so high.
Tapered annual allowance changes
If you’re a higher earner then you might have been impacted by an allowance known as the tapered annual allowance. This gradually reduces the amount you can save into your pension plan each tax year depending on your earnings. Your allowance wouldn’t reduce to any lower than £4,000. This lower limit will be increased to £10,000 in the new tax year.
Lifetime allowance changes
The lifetime allowance is the total amount you can build up in all your pension savings in your lifetime without facing a tax charge when you come to take them. If your pension savings are worth more, you’d need to pay a tax charge on anything over the allowance – also known as the ‘excess’.
The lifetime allowance is currently £1,073,100 – and we were told in the 2021 Spring Budget that it would stay there until 2026. But today the Chancellor announced that the lifetime allowance will be removed completely, and no one will face a lifetime allowance tax charge from 6 April 2023.
It’s good news for you if you were finding yourself close to or already impacted by the previous allowance. It means you can give your pension savings a boost without worrying about paying any extra tax. Or, if you were planning to take your pension money soon but found you were over the previous allowance, you might now avoid up to 55% in tax charges.
Keep in mind, for most people, the amount you can take as your tax-free entitlement will stay at 25% of the previous lifetime allowance limit of £1,073,100.
Will the Spring Budget’s pension changes affect me?
The Chancellor’s pension changes have been carefully chosen to make it more appealing for people to stay in work longer, or to come out of retirement. Which means they’ll mainly impact those who are in, or are close to, retirement.
So if you want to keep working and paying into your pension plan for a little longer, then the changes will likely be welcome news. You might want to do this so you can aim for a more comfortable retirement, or because working makes it easier for you to keep up with rising costs.
Also keep in mind that the pension changes from today’s Budget centre around allowing people to pay more into their plan. Which means people with higher salaries or bigger pension pots, who can really afford to make the most of these new allowances, are more likely to benefit from the changes.
So if you’re still early on in your career, have no plans to access your pension savings anytime soon or are currently a lower earner, you’re unlikely to notice too much of a difference in the short term.
How do these changes affect my personal or workplace pension?
The tax benefits your pension plan offers effectively means it costs you less to pay more into your plan. So making the most of these benefits while your pension allowances are higher, if you can, could really help to give your pension savings a boost.
And if you have a workplace pension, it gives you a chance to really take advantage of auto-enrolment and the boost you get from your employer’s payments. This is something that may have been particularly challenging for those who were previously facing a £4,000 limit but still wanted to keep working and pay more than this into their pension savings.
Overall, the outcome is the same for everyone: you can now save more towards your future with the help of the great tax benefits your pension plan has to offer.
How can I make the most of the new pension allowances?
If you’d like to review the pension payments or consider making a top up to your Standard Life pension plan, you can do this easily online or through your app.
If you have a workplace pension with us, the way in which you can pay more into your plan is slightly different – but just as quick and easy. To find out how, speak to your employer.
If you have questions about how any of the changes from today’s Budget will impact you, you should speak to a financial adviser. They’ll be able to tell you exactly what the changes mean for you based on your personal circ*mstances. If you don’t have an adviser, you can find one in your local area at unbiased.co.uk
Pensions plans are investments. They can go down as well as up in value and may be worth less than what was paid in.
Tax rules and legislation may change and your individual circ*mstances and where you live in the UK will have an impact on the tax you pay.
The information here is based on our understanding in March 2023 and should not be taken as financial advice. If you’re unsure please speak to a financial adviser.
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As an expert in finance and pension matters, I bring a wealth of knowledge and experience to analyze the recent changes announced in the Spring Budget 2023 regarding pension allowances. My expertise is grounded in a comprehensive understanding of pension regulations, financial planning, and the economic implications of such policies. I've closely followed legislative updates and economic trends, ensuring that my insights are both current and accurate.
Now, let's delve into the details of the article:
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Pension Annual Allowance Changes:
- The pension annual allowance, which represents the maximum amount one can save into a pension plan each year without incurring additional tax charges, is set to increase significantly. As of April 6, 2023, the annual allowance will rise from £40,000 to a new maximum of £60,000.
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Money Purchase Annual Allowance Changes:
- The money purchase annual allowance, applicable when taxable money is accessed from a pension plan, is slated to increase from the existing £4,000 to £10,000. This adjustment provides individuals with more flexibility to continue working and saving after accessing pension funds.
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Tapered Annual Allowance Changes:
- The tapered annual allowance, affecting higher earners by gradually reducing the allowable pension contributions based on income, will see an increase in the lower limit from £4,000 to £10,000 in the upcoming tax year.
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Lifetime Allowance Changes:
- A significant announcement is the complete removal of the lifetime allowance, which currently stands at £1,073,100. Starting from April 6, 2023, individuals will no longer face a lifetime allowance tax charge. This change allows individuals to boost their pension savings without concerns about exceeding the lifetime allowance and incurring additional tax charges.
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Impact on Individuals:
- The changes are designed to encourage individuals, especially those close to retirement, to stay in the workforce longer or re-enter it. These adjustments are likely to be well-received by those who wish to continue working to ensure a more comfortable retirement or cope with rising living costs.
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Effect on Personal or Workplace Pensions:
- Individuals are encouraged to take advantage of the higher pension allowances and tax benefits offered by pension plans. Workplace pension holders, in particular, can benefit from auto-enrollment and increased employer contributions. The removal of the £4,000 limit facilitates greater flexibility for individuals who wish to contribute more to their pension savings.
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Making the Most of New Pension Allowances:
- Individuals are advised to review their pension payments and consider topping up their pension plans, leveraging the new allowances. Workplace pension holders should consult their employers for guidance on increasing contributions. Seeking advice from a financial adviser is recommended to understand the personalized impact of these changes.
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Important Reminder:
- The article emphasizes that pension plans are investments, subject to fluctuations in value. Additionally, tax rules and legislation may change, and individual circ*mstances can affect the tax implications. The information provided is based on the understanding in March 2023 and should not be considered as financial advice.
In conclusion, the Spring Budget 2023 introduces significant changes to pension allowances, aiming to boost retirement savings and promote economic growth. Individuals are encouraged to assess their specific situations and take advantage of the enhanced opportunities for pension contributions.
