In the Spring 2023 Budget, the Chancellor has announced some significant changes to pensions. The first change relates to the amount of money that can be saved into pensions during our lifetime.
Under current rules, the maximum that can be held in pensions before a tax charge is due is £1,073,100. This is to be abolished entirely. This is good news for those with large pensions or who expect to have large pensions, due to contributions, in the future.
The current Lifetime Allowance (LTA) has been set at £1,073,100 since tax year 2020/21. In 2011/12, the LTA had been as high as £1.8m. However, subsequent budgets had reduced this down to a level as low as £1m in 2016/17.
To mitigate the effects of the reduced allowances between 2011/12 & 2016/17 there have been various LTA protections that were available to help pension holders whose funds were greater than the reduced LTA when the reductions were announced. It would seem that these protections will now become redundant (see Standard Life PCLS protection). This is potentially good news for those pension holders who found that they were unable to contribute to their pension over the last decade.
It is worth noting, that there does not appear to be any changes to the tax treatment of pensions following a pension holders death. In most instances, funds held within a pension do not form part of a persons estate and are therefore excluded from an Inheritance Tax (IHT) calculation. The tax that is due on an estate over the Inheritance Tax threshold is 40%. Therefore, retaining funds in a pension may be a useful legacy planning tool. The tax treatment of death benefits, along with the succession options, can be a complex area and we would recommend that you speak with your Financial Planner to understand the specific implications to you.
The budget also announced an increase in the pension annual allowance. For the past 9 tax years, the standard annual allowance has been limited to £40,000. However, the Chancellor has announced that this will increase to £60,000 for the forthcoming tax year. For higher rate and additional rate tax payers, this will give the opportunity to increase pension contributions which will help to save income tax.
In most cases, it is possible to carry forward unused pension allowances. This can be for up to 3 previous tax years. For those savers that have not contributed to a pension in recent years to avoid exceeding the Lifetime Allowance this could be advantageous.
There was further good news for those earning over £260,000 as the minimum tapered annual allowance will increase from £4,000 to £10,000. Finally, for those who have already accessed their pensions flexibly, the Money Purchase Annual Allowance has also been increased from £4,000 to £10,000.
What actions should you now consider taking? If you have previously been affected by the Lifetime Allowance or if you are a higher or additional rate tax payer, you should speak with your Financial Planner to understand how these changes affect your own position and consider if this should prompt a change to your financial planning.
Have a question?
Our Wealth Management team are happy to answer any questions you may have. Please contact them today on 02920 853788 or email them at contact@thomas-carroll.co.uk
