UK Pension Allowances From April 2023

  • UK Pension Allowances April 2023

UK Pension Allowances From April 2023

Navigating the world of pensions and allowances can be a tricky process, but with the right knowledge it can become much simpler. In this article, we take a look at the pension allowances available following the major changes made by the Chancellor in the Spring 2023 budget.

Types of Pension Allowance

There are 5 specific pension allowances we will focus on, each with their own set of tax rules and regulations:

  • The Pension Annual Allowance

  • The Money Purchase Annual Allowance

  • The Tapered Annual Allowance

  • The Pension Advice Allowance

  • The Lifetime Allowance

So how have each of these pension allowances been affected by the changes made in March budget?

What is the Pension Annual Allowance?

The Pension Annual Allowance is the maximum amount an individual can add to their pension pots, each tax year, without incurring tax charges. It applies to UK registered pension scheme, including defined benefit (final salary) schemes and defined contribution (money purchase) schemes.

In the Spring 2023 budget, the pension annual allowance was increased from £40,000 to £60,000.

What counts towards the annual allowance?

The Pension Annual Allowance includes all pension payments made by an individual, including personal / employer contributions, and any others made by a 3rd party on their behalf.

For defined benefit schemes, the annual allowance is based on the increase in the value of the pension benefits accrued during the tax year. The increase in value is calculated using a factor of 16, and any amount above the annual allowance will be subject to a tax charge.

pension lifetime allowance removed

For defined contribution pension schemes, the annual allowance is based on the total amount of contributions made during the tax year. This includes both the employee and employer contributions. For tax relief purposes, personal contributions are deemed to have been paid net of basic rate tax, which means that the pension scheme will claim basic rate tax relief from HM Revenue and Customs (HMRC) on the individual’s behalf.

It’s important to note that the Pension Annual Allowance includes all contributions, regardless of whether they are made to a workplace pension scheme, a personal pension plan, or a self-invested personal pension (SIPP). Therefore, if an individual is contributing to multiple pension schemes, they need to ensure that the total amount does not exceed the annual allowance, to avoid incurring tax charges.

Can you carry forward unused annual allowances?

Yes, it is possible to carry forward any unused Pension Annual Allowance from the previous three tax years, provided that the individual was a member of a registered pension scheme during those years and did not use up their full annual allowance.

This means that if an individual did not make any contributions to their pensions in a previous tax year or only used a portion of their annual allowance, they may be able to use the unused allowance in the current tax year, in addition to the standard annual allowance for that year.

However, in order to use the carry forward allowance, the individual must have used up their full Pension Annual Allowance for the current tax year first. Additionally, the carry forward allowance can only used to the extent that the individual has sufficient earnings and tax-relievable contributions to support it.

It’s also worth noting that any unused allowance from the earliest of the three previous tax years must be used first, before the allowance from the more recent tax years can be used. The rules around carry forward can be complex, so it’s always advisable to seek professional financial advice if you are considering using this option.

On a separate note, if you are thinking about pausing or stopping contributions for a while on the basis you can build them back up again in the future, check out this article before you do: https://ttwealth.co.uk/can-i-pause-or-cancel-my-pension-contributions/

What is the Money Purchase Annual Allowance (MPAA)?

The Money Purchase Annual Allowance (MPAA) is a limit on the amount that an individual can contribute to their defined contribution pension scheme, such as a personal pension plan or a self-invested personal pension (SIPP), AFTER they have accessed their pension benefits flexibly.

Flexibly accessing your benefits means taking income or lump sum payments from your pension savings, either through income drawdown or by purchasing an annuity. Once you have done this, the MPAA limit will apply, and it will restrict the amount of tax relief you can receive on contributions to your defined contribution pension scheme.

In the 2023 Spring budget, the Money Purchase Annual Allowance was increased from £4,000 to £10,000 per tax year.

money purchase annual allowance

What is the Tapered Annual Allowance?

The Tapered Annual Allowance is a mechanism used by HM Revenue and Customs (HMRC) to reduce the amount of tax relief available on pension contributions for high earners. It applies to individuals who earn above a certain threshold and who also have an annual allowance of more than £60,000 for pension contributions.

In the Spring 2023 budget, the tapered annual allowance was increased from £4,000 to £10,000

So, for the tax year 2023/24, the threshold income is £200,000, and the adjusted income is £260,000.

The threshold income is calculated as an individual’s income from all sources, including employment, self-employment, and investments, but before any pension contributions are made. The adjusted income includes all sources of income, including pension contributions, but also takes into account any employer pension contributions.

If an individual’s adjusted income exceeds £260,000 and their threshold income is above £200,000, their annual allowance for pension contributions will be reduced by £1 for every £2 of adjusted income above the £260,000 threshold, up to a maximum reduction of £30,000. This means that the annual allowance can be reduced to as low as £10,000 for high earners, significantly limiting the amount of tax relief available on pension contributions.

tapered annual allowance-increase 2023

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What is the Pension Advice Allowance?

The Pension Advice Allowance is a government initiative introduced in 2017, that allows individuals to withdraw up to £500 from their pension pot, tax-free, to pay for independent financial advice on a range of retirement planning issues, including pensions, annuities, and drawdown.

It can only be used once in any tax year, and up to a maximum of 3 times in total.

To be eligible for this allowance, an individual must be aged 55 or over and have a defined contribution pension scheme. They must also ensure that their pension scheme allows for withdrawals under the Pension Advice Allowance.

It’s worth noting that the advice allowance cannot be used to pay for advice on other financial matters, such as investments or debt management. Additionally, if the cost of the advice is more than the allowance, the individual will need to pay the difference themselves.

The Pension Advice Allowance can be a valuable resource for those looking to plan for their retirement and ensure they make informed decisions about their pensions.

No changes were made to this allowance in the Spring 2023 budget.

What is the Lifetime Allowance (LTA)?

The Lifetime Allowance (LTA) was a limit on the total value of pension benefits that an individual could build up over their lifetime without incurring additional tax charges. The LTA applied to all UK registered pension schemes, including defined benefit (final salary) and defined contribution (money purchase) schemes.

In the 2023 Spring budget, the Lifetime allowance was removed.

These changes mean these LTA tax charges will no longer be applicable from 6 April. While the actual removal of the LTA entirely needs to pass through Parliament, it will still continue to exist without any tax charge. The government is aiming for it to be entirely abolished as of 6 April 2024. The impact on pension savers will be almost immediate, as from the 2023/24 tax year there will be no LTA charge, regardless of the size of your pension.

Currently, individuals are typically able to draw up to 25% of their pension benefits up to the LTA as a tax-free lump sum. The removal of the LTA won’t remove this limit on tax-free lump-sum withdrawals. As of the 2023/24 tax year, the maximum Pension Commencement Lump Sum (PCLS) will be retained at £268,275 (i.e., 25% of the LTA) and will be frozen thereafter. Except for people who have a right to either a higher lifetime allowance or have pension commencement lump sum protection.

pension lifetime allowance removed

For example, Fixed Protection 2016 secures your LTA at £1.25m when it was reduced previously. Although the applications in terms of LTA protection are now limited to either Individual or Fixed Protection 2016, they could offer a greater PCLS than is currently available (25% of £1.25m in this example).

If you are unsure about your transitional protection arrangements, please speak to your financial planner.

In Summary

The changes to pension allowances made by the Chancellor are designed to incentivise individuals to remain in employment longer or to return to work, and as such, they will predominantly affect those who are approaching or have already reached retirement age.

For those who wish to continue working and contributing to their pension plan, these changes may be seen as positive news. This may be particularly appealing to those seeking a more financially comfortable retirement or who wish to keep up with rising costs by working longer.

How might these pension changes affect your individual retirement plans?

Book an appointment (using the button below, or email to tony@ttwealth.co.uk) to find out and ensure you’re able to make informed decisions about your pension savings and retirement goals.

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2023-04-28T11:14:27+01:00Financial Planning, Pensions|0 Comments

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