In recent years pensions have been neglected or ignored in the annual budget, so it was some surprise when the UK government’s budget announcement on 15th March 2023 significantly changed the rules regarding pension savings. It was twice the shock that the changes didn’t negatively impact savers.
The previous policy of disincentivising saving has somewhat contributed to in their 50’s removing themselves from the workforce altogether, and with a shrinking workforce due to Covid, Brexit and an aging population, these changes were made with the primary focus of getting early retirees back into work.
The chancellor acted swiftly, making significant changes focused largely on the over 50’s, but providing additional saving opportunities to all.
One of the key changes is the scrapping of the lifetime allowance for pensions. This allowance is the maximum amount of money that can be saved into a pension scheme without facing additional taxes. Previously set at £1,073,100, there was a 55% tax charge on lump sum payments exceeding £1,073,100, and a 25% tax charge on withdrawals over this amount. The chancellor announced that ‘lifetime allowance’ is being abolished completely from 6th April 2023, providing a huge benefit to those with larger pension pots, as they will not only be able to save more money without incurring tax penalties, but also not be disadvantaged by the investment growth through smart asset allocation in the pensions. As pensions fall outside of the estate for inheritance tax purposes, there is an additional, less obvious benefit to increasing the contributions.
Another change to UK pension policy is a 50% increase in the amount that can be contributed to a pension whilst benefitting from tax relief, known as the annual allowance. Currently set at £40,000, from 6th April 2023, the annual allowance will increase to £60,000 allowing individuals to save more money each year. When combined with the removal of the Lifetime Allowance, a pension scheme has regained its status as a highly tax efficient savings vehicle.
Finally, higher earners and retirees can also benefit from an increase in the Money Purchase Annual Allowance which has risen from just £4,000 to £10,000. This means that even if you have previously drawn down from your pension pot, you can continue to contribute at a more significant level than previously.
Overall, these changes to pension allowances represent a significant step towards improving the retirement prospects of millions of people in the UK. By providing more generous allowances for pension savings, the government is taking important steps to address the challenges facing many employees and business owners who want to save for retirement more efficiently.
