Several significant changes were announced by the Government in the 2023 Spring Budget regarding the annual allowance and the lifetime allowance.
These changes affect the amount of tax-free contributions individuals in the UK can make towards their pensions, which may have an impact on their overall pension strategy.
Annual allowance
The annual allowance is the amount of money in a year that you can add to your pension before you are taxed.
On 6 April 2023, the annual allowance was increased to £60,000 from £40,000, a considerable rise that will give many people the opportunity to save more towards their pension.
With this increase in mind, have you considered changing your yearly pension contributions?
The allowance includes any money paid into a defined contribution scheme in a tax year by you or your employer, plus any increase in a defined benefit scheme in a tax year.
If you have any pension savings from the previous three years that are more than the annual allowance, you may be entitled to carry this over.
Although the changes to the annual allowance will benefit many in the UK, in some instances your annual allowance may still be lower than £60,000.
This could be due to a high income, or if you have flexibly accessed your pension pot. If you are unsure about this or need pensions advice, please speak to an independent financial adviser.
Lifetime allowance
The lifetime allowance, which is currently £1,073,100, is the overall amount of money you can add towards your pension before you are taxed.
From the 2023/24 tax year, anyone taking out a pension will not face the lifetime allowance, and as of the 2024/25 tax year, the lifetime allowance will be fully abolished, including for existing pensions.
While the annual allowance will curb the amount you can save to an extent, the absence of a lifetime allowance should push more people into saving more for their pensions.
With the lack of a lifetime allowance, you should consider the options open to you to save as much money as you can into your pension pot. An independent financial adviser can assist you with this.
Money purchase annual allowance and tapered annual allowance
Positive amendments were also made by the Government to the money purchase annual allowance and tapered annual allowance.
The money purchase annual allowance affects those who have started to withdraw from their pension but are still paying into it. Before 6 April 2023, the amount that you could contribute to your pension before being taxed was just £4,000 but has now increased to £10,000.
Are you withdrawing from your pension but still want to contribute to it? The increase to the money purchase annual allowance gives greater flexibility for those wanting to do so, please speak to a financial adviser for more advice.
The tapered annual allowance affects those whose threshold income is over £200,000 and whose adjusted income is £260,000.
This adjusted income threshold has been increased to £260,000 from £240,000.
Independent financial advice
While the recent Government changes to pension savings are seen as a positive for many across the country, it is important that individuals plan accordingly and make sure that they are fully aware of their financial thresholds to ensure that they make the most of these amendments.
Please contact us today for expert advice and assistance on this matter.