As part of the Spring Budget on 15th March, Chancellor Jeremy Hunt announced significant changes to the amounts individuals can save in their pensions, which will be welcome news for higher income taxpayers.
The Annual Allowance is the maximum amount of pension savings an individual can make each year without incurring a tax charge.
From April 2023, the Annual Allowance will increase from £40,000 to £60,000.
Tapered Annual Allowance
Although most individuals are entitled to a full annual allowance, the allowance is restricted for individuals with income above certain levels.
However, from April 2023, the income level for the Tapered Annual Allowance to apply will increase from £240,000 to £260,000.
Furthermore, the minimum Tapered Annual Allowance also increases from £4,000 to £10,000.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) will potentially apply where an individual starts to take money from a defined contribution pension pot.
Where the MPAA applies, the amount that can be contributed into your pension might be reduced.
From April 2023, the MPAA increases from £4,000 to £10,000.
The Lifetime Allowance (LTA) is the maximum amount of tax relievable pension savings an individual can benefit from over the course of their lifetime.
Individuals may contribute to their pension over these limits, but they will be subject to a tax charge on any amount which exceeds the allowance.
In a significant announcement, the Chancellor announced the abolition of the LTA from April 2023.
These reforms are designed to ensure that highly skilled individuals such as NHS clinicians are not discouraged from remaining in the workforce by reducing the risk of incurring significant pension tax charges.
Now that the limit on the lifetime allowance is being removed, high earners will have the opportunity to save unlimited funds in pensions.
In the future, pensions could also be used for effective inheritance tax planning as under current rules, most pension pots are inherited free of inheritance tax, and are taxed at the individual’s effective tax rate.
Most pensions are set up under a discretionary trust and the pension holder must name the beneficiaries of their pensions for this to work. It is unclear whether the government will introduce some anti-avoidance rules to address this issue. It is likely this will become clear once the full legislation is released later this year.
At the moment, when an individual becomes entitled to their pension benefits, they can often make use of the Pension Commencement Lump Sum (PCLS), which is currently 25% of an individual’s available LTA.
The government is planning to introduce a PCLS upper monetary cap of £268,275 (25% of the current LTA). If you have LTA protection in place, you may be able to withdraw a higher PCLS.
The 50% increase in the annual allowance announced by the Chancellor, together with the increase in the Money Purchase Annual Allowance to £10,000 has undoubtedly opened the way to increased pension savings for some.
For the highest earners, the removal of the lifetime allowance will be a welcome move but will actually benefit fewer than 10,000 individuals a year.
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