We round up key pension changes made in today’s Budget.
As usual, ahead of today’s Budget there was plenty of speculation over the contents of Chancellor Jeremy Hunt’s briefcase.
Before Hunt stepped up to the despatch box, the measures were coined a ‘back to work’ Budget, with changes to pension allowances at the centre.
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The lifetime allowance, or LTA, has been abolished. The lifetime allowance, currently £1.07 million for this tax year, is the amount you can accumulate across all your pension schemes (excluding your state pension) and not incur an extra tax charge – which is 55% on amounts above the allowance.
Prior to the Budget, it was expected that the allowance would be extended to £1.8 million, but Hunt pulled the proverbial rabbit out of the hat by abolishing it completely. The government said that the lifetime allowance charge will be removed from April 2023 before the allowance is gone for good from April 2024.
The pension tax charge was encouraging senior public sectors workers such as doctors and civil servants to retire early rather than face tax penalties, exacerbating the staffing crisis in the NHS. By removing the allowance, the government is hoping that doctors will work for longer, and that some may decide to come out of retirement.
Hunt said as part of his Budget speech that the policies “break down barriers that stop people from working”. He also said: “I don’t want any doctor to retire early because of how pension taxes work. The issue goes wider than doctors...[abolishing the lifetime allowance] will incentivise our most experienced and productive workers to stay in work for longer.”
In response to the removal of the lifetime allowance the 25% tax free lump sum when accessing a pension will be capped* at £268,275. Previously the tax-free lump sum was capped at 25% of the lifetime allowance but now the cap will be separate, with the potential it could be reduced in the future.
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Another key pension change, which it is hoped will also encourage people to work for longer, is the so-called Money Purchase Annual Allowance (MPAA), which has been increased from £4,000 to £10,000 a year. This gives greater flexibility to boost retirement savings for those who have accessed their pensions.
A third key pension change is that the pensions annual allowance has been increased from £40,000 to £60,000.
As far as ISAs are concerned, the annual allowance of £20,000 remains . The old process was for the ISA allowance to rise with inflation every year, but this has not happened since it was increased to £20,000 in April 2017. The allowance is the highest it has ever been. ISAs protect wealth from the taxman, with no tax to pay on capital gains or dividends. The Junior ISA yearly limit will also remain at £9,000.
Below, we go into more detail on the pension changes.
The lifetime allowance, essentially a stealth tax on investment success, has been progressively whittled away over the years to boost the Treasury coffers since it was introduced at £1.5 million in 2006 by the then chancellor Gordon Brown. Calculations by interactive investor show that the allowance has more than halved in real terms since its introduction, and would be £2.3 million if it had risen in line with inflation.
Under current rules, which will be abolished, someone with a defined benefit pension would trigger the lifetime allowance charge once their annual pension income hits £53,655.
Alice Guy, head of pensions and savings at interactive investor, says: “The lowering and then freezing of the lifetime allowance means that a punitive 55% tax rate, originally intended for the super-rich, is catching more and more ordinary pension savers in the net.”
Money Purchase Annual Allowance
The MPAA impacts those who have begun to withdraw a taxable income from a pension, and would like to continue building further retirement savings. Since 2017, people in this situation have been limited to contributing £4,000 a year of pension savings, or face a tax charge.
However, the good news is that the allowance will be increased to £10,000, which was the level it was prior to being cut. The reason why the government lowered the allowance in 2017 was over concerns that pension savings were being “recycled” to take advantage of pension tax relief.
For those over 55 who would like to return to the workforce and boost their retirement savings, the increase in this allowance gives them much more flexibility.
The MPAA applies to defined contribution pensions only. Therefore, doctors in a NHS defined benefit pension scheme are not impacted by this change.
The amount you can put into your pension each year will increase from £40,000 to £60,000. This is capped at your taxable income.
For higher earners, the tapered annual allowance will be increased from £240,000 to £260,000 from 6 April 2023.
Savers are currently able to access their work and personal pension pots from the age of 55, but this is due to rise to 57 from 2028.
The state pension age will rise from 66 to 67 by 2028, and then to 68 between 2044 and 2046. However, this could change, and be brought forward, as we explain in this separate article.
*In an earlier version of this article it was incorrectly stated there was no previous cap on the tax-free lump sum.
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