<p class="subtitle">In his Spring Budget, Jeremy Hunt made several announcements that could affect your finances. Among them were significant changes to pension allowances, which came into force at the start of the new tax year on 6 April. We explore what the Budget could mean for you, depending on your circumstances, and how you can make the most of your pension allowances in the new tax year.
"I haven’t touched my pension savings and I’m still paying into my plan”
Your annual allowance is the total you, your employer and any third party can pay in across your pension plans in a tax year before you face an extra tax charge. It used to be £40,000 or your total earnings – whichever was lower. But it’s now £60,000.
If the previous £40,000 pension allowance applied to you, more money can now be paid into your plan(s) before you need to pay a tax charge. So if you can afford to do so in the 2023/24 tax year, you might decide to pay more in to make the most of your increased allowance.
Your annual allowance will have renewed on 6 April. Don’t forget, you can normally carry forward any unused allowances from the last three tax years.
“I’ve taken or will take taxable money from my pension plan”
When you take taxable money from your pension plan – either through taking a flexible income (drawdown) or by withdrawing lump sums – you typically trigger the money purchase annual allowance. This causes your annual allowance to reduce.
Before 6 April, your money purchase annual allowance would’ve been £4,000 if you triggered it. But now it’ll only go as low as £10,000. You can’t carry this forward, though.
You won’t trigger it in all situations – for example, if you buy a certain type of guaranteed income for life (annuity) or take a ‘small pot’ (under £10,000) as a lump sum. So check to see if the allowance applies to you.
The change to the money purchase annual allowance could benefit you if you’ve already accessed your pension savings (or think you will this year) but intend to continue saving into a pension plan.
For example, you might’ve dipped into your pension savings to top up your earnings from work as the cost of living started to increase. Or you may have taken some money from your pot if you were experiencing financial difficulties during the pandemic.
Whatever your situation, if you previously found yourself limited by the money purchase annual allowance but want to boost your pension savings before you retire, this change will be good news for you.
And if you’re thinking of unretiring and will start paying into a workplace pension plan again, you can now put in a little more without facing a tax charge.
“I’m a high earner and saving into a pension plan”
Affecting high earners, the tapered annual allowance gradually reduces your annual allowance each tax year depending on your earnings. Previously, the tapered annual allowance could reduce your allowance all the way down to £4,000. But this lower limit’s been increased to £10,000.
This could impact people who have an ‘adjusted income’ of over £260,000 in the 2023/24 tax year. This doesn’t just include your salary. It also includes things like your (and your employer’s) payments into your pension plan. It’s a complicated system, so if you think you may be affected by it, it might be worth seeking financial advice. If you don’t already have a financial adviser, you can find one at unbiased.co.uk.
Overall, if you’re affected by the tapered annual allowance, you can now save a bit more into your pension plan without facing a tax charge.
“I’ve been concerned about exceeding the lifetime allowance”
The lifetime allowance refers to the total amount you could build up in pension savings in your lifetime without needing to pay an additional tax charge when you take your pension money.
The lifetime allowance – which is £1,073,100 – isn’t due to be totally removed until 2024. But as a result of the Spring Budget, the lifetime allowance tax charge no longer applies from 6 April this year. Previously, this tax charge would be on anything over your lifetime allowance (your ‘excess’).
This change could really benefit you if you’re planning on taking money from your pension plan in the current tax year. If your savings have crept close to – or have already exceeded – the lifetime allowance amount, you now won’t have to pay an extra tax charge. Under the old rules, you could be taxed at as much as 55% if you took your excess as a lump sum. Now if you take your excess as a lump sum, you’ll pay income tax on it, but not the 55% charge. So the removal of the charge could save you a lot of money.
Keep in mind you can normally take 25% of your plan’s value tax-free, up to a maximum of £268,275. (£268,275 is 25% of £1,073,100 – the lifetime allowance). If you have protection in place, though, the amount you can take tax-free from your plan could be higher than £268,275.
The removal of the lifetime allowance tax charge could even be good news for people who want to work for longer and not touch their pension savings for a while. It means you can leave your pension savings untouched and potentially give them an opportunity to grow without worrying about exceeding your lifetime allowance. You might even decide to pay more into your plan to give your savings a boost to take advantage of the removal.
Previously, people who were nearing the lifetime allowance might’ve rushed to leave the workforce and take their pension savings. They may have felt the tax charge outweighed the benefits of continuing to work and save. The tax charge was most likely to have impacted high earners, like some doctors.
If your pension savings are nearing or have exceeded the lifetime allowance, consider seeking financial advice to help you better understand how the changes affect you, or how you might be impacted in future. You may also want to get financial advice if you have a protected lifetime allowance so you can understand how the changes apply to your specific situation.
Making the most of the new tax year with these Budget changes
As we’ve mentioned, you might want to pay more into your pension plan. You could do this by putting a little more into your plan each month or by making a one-off payment into your plan. You’ll just need to think about whether you can afford to put more in and whether it’s right for your circumstances. Remember, a pension is an investment. Its value can go down as well as up and may be worth less than was paid in.
If you have a Standard Life personal pension plan and you’d like to pay a bit more in, you can do this online or through your app.
If you have a Standard Life workplace pension, the way in which you can pay more into your plan is slightly different – but just as quick and easy. Speak to your employer to find out how.
If you have a workplace pension plan, another way to take advantage of your increased allowance is to check if your employer would be willing to pay in more. Your employer usually needs to pay in a minimum of 3% of your ‘qualifying earnings’, while you normally pay in a minimum of 5%. But some employers will be willing to put in more than their minimum, and others will match what you’re paying into your plan up to a certain amount.
And keep in mind pension plans usually come with tax benefits, often in the form of tax relief – meaning the more you pay into your plan, the more the government adds to your plan. To learn more about how this works, read our tax relief article.
A pension is an investment and its value can go down as well as up and may be worth less than was paid in.
Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.
The information here is based on our understanding in April 2023 and shouldn’t be taken as financial advice.
Standard Life accepts no responsibility for information in external websites. These are provided for general information.