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.
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
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 circumstances. 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 circumstances 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.