The chancellor, Jeremy Hunt, introduced a number of changes with respect to pension rules. I’ve outlined five of them with opportunities for your consideration. Please note, these points are an interpretation of the announcements and do not constitute advice nor an investment recommendation.

Annual allowance

What is it?

The annual allowance is the maximum you can contribute into a pension per tax year. This includes employer contributions, personal contributions and tax relief. It is currently up to £40,000 per tax year.

What did the budget announce?

It will rise to £60,000. That’s a huge 50% increase from today.

What opportunity does it present?

The ability for you to contribute to your pensions at much greater value, without suffering a tax penalty. If you own a limited company, you have the ability to control the level of company pension contributions, meaning the opportunity could be significant. If you’re employed, you could consider adjusting your pension contributions to reduce your taxable income whilst giving your pension a sizeable boost each month/year.

Tapered annual allowance

What is it?

It is a mechanism to reduce the amount you can save into a pension and receive tax relief. The calculations can be complicated, but if you have ‘adjusted income’ in excess of £240,000, the amount you can contribute into a pension is reduced from £40,000 to as low as £4,000 per tax year.

What did the budget announce?

This allowance remains, but is being increased to £10,000 and also, the adjusted income level is being increased to £260,000.

What opportunity does it present?

If you’re a higher-earner, you/your employer can contribute more into a pension without a tax charge!

Money Purchase Annual Allowance (MPAA)

What is it?

The MPAA effectively replaces the standard annual allowance once you have accessed a money-purchase pension, flexibly – e.g. you’ve taken some tax free cash AND income. It currently means you are limited to contributing up to £4,000 per tax year into a pension.

What did the budget announce?

This is rising to £10,000 per tax year.

What opportunity does it present?

If you have accessed a pension and started to draw an income, then you will have the opportunity to contribute into a pension, at up to £10,000 per tax year and perhaps replenish some of those drawings.

Lifetime Allowance (LTA)

What is it?

This is the amount you can save into pensions without incurring a further tax charge. It is not the maximum you can save into a pension.

It is currently £1,073,100. If you access pensions at a value in excess of this figure, your pension is subject to a further tax charge at either 25% or 55%.

What did the budget announce?

The Lifetime Allowance has been abolished! As before, you can save as much as you want, into pensions, but the budget changes mean that you can access it without the punitive tax charges. In 23/24 the tax charge will be zero and then LTA abolished from April 2024.

What opportunity does it present?

You can save into your pension without the fear of a future tax charge when you come to access it. If you have been considering whether it is ‘worth’ contributing into a pension because you have been close-to, or above the LTA, then depending on other circumstances, this might present the opportunity to save tax on contributions and build your pension savings.

Tax free cash

What is it?

The technical refence being ‘Pension commencement lump sum’ (PCLS) – typically known as taking 25% tax-free from your pension(s).

What did the budget announce?

Whilst the LTA has been removed, there remains a cap on the amount of tax free cash you can enjoy, which has been set at 25% of the current LTA, meaning £268,275.

What opportunity does this present?

None really, however, it’s still a large value. Careful consideration should be taken with respect to accessing tax-free cash, as remember, once cash is removed from your pension, it is within your estate for the purposes of Inheritance Tax.

There are many financial planning opportunities as a result of the changes announced in the budget – if you’d like to review what they mean for you, get in touch. The value of pensions can fall as well as rise and you may get back less than you contributed.

Thanks for reading.