There are various allowances associated with pensions and in this blog, we’ll have a brief look at the annual allowance and lifetime allowance, with 7 points for you to action.

Annual allowance

The annual allowance is the maximum you can contribute into a pension each year. It was increased from £40,000 to £60,000, with effect from 6^th April 2023. Your personal allowance is the lower of £60,000 or your relevant earnings (this excludes income from properties, interest and dividends for example). For personal contributions, the £60,000 allowance includes tax relief, so if you contributed £30,000 to your pension, it would be grossed up to £37,500, including basic rate tax relief (higher rate and additional rate relief is claimed through your tax return). That would leave a further gross allowance of up to £22,500, within in the £60,000 annual allowance.

You can also carry forward unused allowances from prior tax years, but that’s for another blog but it does offer the potential to contribute significantly more to a pension scheme.

Lifetime allowance (LTA)

The 2023 spring budget brought changes to the lifetime allowance, that few, if anyone foresaw. It has certainly opened some opportunities for many people, notably those who were near, at or above the lifetime allowance.

What is the lifetime allowance?

It is the value of pension funds that you can access whilst retaining certain tax advantages. It was not a cap on the total you can save into a pension. The allowance was £1,073,100.

The spring 2023 budget announced the scrapping of this allowance, subject to legislative changes. Prior to this, if you wanted to access your pension(s) and they were more than this allowance, you were potentially subject to an additional tax on the excess, at between 25% & 55%. In the 23/24 tax year, the LTA calculation when accessing pensions is still completed, but the tax rate is 0%. From 24/25, the government plan to scrap the LTA completely.

Tax free cash

Tax-free cash is one of the many attractive benefits of a pension and something that many people consider as the main benefit. For those with large pensions (whether defined contribution [DC] or defined benefit [DB aka a final salary scheme]) there is a limit up to which you can enjoy tax-free cash, which is typically 25% of the value of the pension, capped at 25% of the LTA (£268,275).

Deciding on the order in which to access your pension(s) can be a big decision and potentially have consequences on your future income and tax liability. The changes expected to be enacted through legislation, bring further changes and opportunities, particularly for those who have accessed pensions previously.

For example, if you have already taken income from a DB pension but took little or no tax-free cash and have a DC pension that you have not yet accessed, you may be able to take more tax-free cash from your DC pension than you had anticipated. There are many factors to be mindful of, including the fact that the legislation is yet to be passed. However, careful planning could provide significant benefits.

What should I do?

As ever with personal financial planning, options and opportunities are subject to your personal circumstances. However, some broad thoughts are below:

1. Ensure you have money available for a ‘rainy day’ / emergency
   1. If this is in place and you have cash available, consider the following:
2. Review what pension contributions have been made to date in this tax year
   1. Include both personal and employer contributions
   2. Is it below the annual allowance of £60,000?
3. Review your likely taxable earnings
   1. Are you expecting a bonus?
   2. For employed people, this total sets the scene for the value of potential contributions
   3. For business owners, review available business profits
4. Review your existing pension arrangements – would a further contribution make sense?
   1. Do you have ISAs (Individual Savings Account)? Could an ISA contribution be more beneficial for your position?
5. Have you ‘flexibly accessed’ a pension?
   1. If so, this will reduce the value that you can contribute
   2. This is called the Money Purchase Annual Allowance (£10,000)
6. If you want to contribute, make sure you do in good time ahead of the tax year end
   1. Remember that’s the 5th of April
7. You will get another annual allowance from the 6th of April
   1. That’s another allowance of up to £60,000

If you’re unsure of how the variance allowances interact, or a plan for your pension arrangements, get in touch and enjoy the journey.