The recently unveiled Spring Budget included a raft of announcements, with major implications for everything from taxation to business investment.
But among the most hotly anticipated and closely scrutinised were the measures relating to pension allowances.
Let’s take a look at how these changes could impact your retirement savings and income and why now, more than ever, you should speak to us about your pension.
What does it mean for the tax-free pension limit?
The pension annual tax-free allowance is up by 50%, from £40,000 to £60,000. This includes payments from you, your employer or a third party. So if you’re thinking of paying extra into your pension to make up for any years that you didn’t contribute much – if at all – then this could be good news for you in terms of being able to boost your income for your later years. .
What’s happening to the tapered and money purchase annual allowances?
There’s some welcome news for both high earners hoping for tax relief on pension savings and for those looking to increase their pension pot after previously dipping into it. Before April 6, both the tapered and money purchase allowances could significantly restrict these tax-free contributions to as low as £4,000 every year. The decision to increase both to £10,000 – a rise of 150% – will give significantly more breathing space for those who are savvy about their financial future. The measures are designed in part to encourage older people back into the workforce
The tapered annual allowance does mean that if you’re a high earner you’re hampered by limits on how much tax relief you can get on your pension savings. However, this will now only affect those bringing in an adjusted income of more than £260,000, up from a previous limit of £240,000 each year.
And how about the lifetime allowance charge?
The allowance – one which restricted the amount you could draw from your pension in your lifetime without being hit with a higher tax bill – previously stood at £1.07million. Those whose pension savings were worth more would be hit with a tax charge on anything over that amount.
But the Chancellor announced the total scrapping of the lifetime allowance in the Spring Budget, which is welcome news to those nearing or already impacted by the previous allowance.
The change was made in the hope of simplifying the UK’s tax system and incentivising older people to stay in work for longer.
Is the Pension Commencement Lump Sum affected?
Although the lifetime allowance is being scrapped, the Pension Commencement Lump Sum, which is a tax-free lump sum when you become entitled to your pension benefits, will be frozen at £268,275, which is 25% of the previous lifetime allowance of £1.07million.
What’s the bottom line?
The pension changes announced in the Spring Budget will mainly affect those who are close to, or who are currently in, retirement. High earners, and those with large pension pots, are those most likely to benefit from the measures.
We can guide you through your options when it comes to your pension, explaining the advantages and disadvantages of each and making decisions with you in line with your life stage, age, needs over time and other sources of income.
Contact us for a discussion on 01420 83517 or email us via email@example.com to see how we could help you make the most of your pension.