What these 3 upcoming pension allowance changes could mean for your clients

As you may already be aware, chancellor Jeremy Hunt made significant changes to pension legislation in his spring Budget speech, delivered in parliament on Wednesday 15 March 2023.

Aiming to incentivise older people to remain in work, and even for retirees to return to employment, Hunt increased two key tax-efficient pension allowances, and plans to abolish the Lifetime Allowance (LTA) altogether.

In the Budget, Hunt stated that “The government believes that workers of all ages have a vital role to play in their place of work and in the wider economy.”

He went on to insist that by raising the amount individuals can pay into their pension without increasing their tax burden, older individuals may be encouraged to continue working for longer.

If you have clients who are planning to retire soon, are already taking their pension, or are in the peak years of their career, the magnitude of these changes cannot be understated.

Read on to find out the three key pension allowances the chancellor has amended, and what this could mean for your clients’ retirement plans in the coming years.

1. The Annual Allowance will rise from £40,000 to £60,000 in 2023/24

Firstly, the chancellor raised the pensions Annual Allowance from its current rate of £40,000 a year to £60,000 starting on 6 April 2023.

He said, “Planning for later life can be difficult, and some may leave the workforce early without a full understanding of their long-term financial resilience.” It is clear the government wants to encourage those approaching retirement age to keep earning – and raising the Annual Allowance is one incentive that could do just that.

The Annual Allowance marks how much your client can contribute into their pension(s) each year while still receiving tax relief from HMRC. This includes employer pension contributions.

So, now that the Annual Allowance has been increased, your clients could boost their yearly tax-efficient pension savings from the 2023/24 tax year onwards.

The ability to save £20,000 more each year with tax relief applied might enable your clients to retire with a larger pot, and enjoy a more comfortable, financially stable retirement as a result.

2. The Money Purchase Annual Allowance will also increase

The Money Purchase Annual Allowance (MPAA) is triggered when those flexibly accessing their personal pension recontribute money back into the pot.

For instance, if your client is still working part-time but has chosen to draw money from their defined contribution (DC) pension to subsidise their income, they might wish to continue making pension contributions from the income they earn.

Crucially, as of the 2022/23 tax year, when the MPAA is triggered, an individual’s Annual Allowance reduces from £40,000 to £4,000. This means that once they’ve flexibly accessed their pension, your client could only recontribute £4,000 a year (including employer contributions) while benefiting from tax relief.

Happily, in the spring Budget, Jeremy Hunt increased the MPAA from £4,000 to £10,000. So, even if your clients have started drawing their pension funds flexibly, they will now be able to reinvest up to £10,000 a year into their pot from 6 April 2023 onwards.

3. The Lifetime Allowance tax charge will be removed altogether on 6 April

In one of the most notable changes to pension legislation since the 2015 Pension Freedoms reforms, Hunt announced he would remove the LTA tax charge from 2023/24 onwards.

Introduced in 2006, the LTA limited how much a person can pay tax-efficiently into their pension(s) over the course of their lifetime. This includes all the pension contributions an individual has made, their employer contributions, investment returns, and tax relief.

In 2022/23, the LTA stands at £1,073,100, and was set to be frozen at this limit until 2026. If your client’s pension(s) do exceed the threshold, they could be taxed at the following rates if they withdraw before 6 April 2023:

• 55% on funds drawn as a lump sum
• 25% on funds drawn as income. This will be on top of their marginal rate of Income Tax.

However, as of 2023/24, no LTA tax charge will be applied to pension withdrawals. What’s more, the chancellor said this removal of the charge will be followed by “completely abolishing it in a future Finance Bill”.

For clients who have accrued substantial pension wealth, this could be incredibly good news.

Now, your clients can keep saving into their pension pot without the worry of an LTA tax charge when they withdraw. This could help them to:

• Maximise their Annual Allowance from now until retirement, without concerns of breaching the LTA
• More accurately prepare for their tax liability when they draw their pension, as their pot is no longer in danger of passing the LTA threshold
• Uphold a better quality of living in retirement
• Build up their pension pot for Inheritance Tax (IHT) purposes. Your clients’ pensions will not usually form part of their estate when they pass away, meaning they could leave substantial wealth to the next generation within a pension that may not be subject to IHT.

In any case, if your clients are on the runway to retirement, or are about to draw their funds for the first time, now is the time for them to get in touch with a financial planner.

These new opportunities will come into place very soon, and working with us here at WKM could help your clients make the most of them from the very beginning.

We can advise on increasing pension contributions, leaving pension funds to the next generation, the tax implications of drawing a large pot even without an LTA in place, and anything else your clients need to know about starting their retirement.

Get in touch

If your clients need help preparing for retirement, put them in touch with us today. Email info@wkmwealth.co.uk or call 0116 403 0138.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.