to retirement tax planning
The headline-grabbing announcement from the March Budget was the abolition of the lifetime pension allowance. However, this may not be quite as advantageous for higher paid individuals as some reporting suggests. The other pension changes announced in the Budget should help less well-off taxpayers with their retirement planning.
The lifetime allowance (LTA), which previously set a maximum of tax relievable pension savings an individual could hold during their lifetime, has effectively been abolished from 6 April 2023 with the disappearance of the LTA charge. The allowance had been £1,073,100 since April 2020.
The Chancellor took this step due to longstanding concerns that the LTA had created a pensions trap for higher earning professionals over the age of 50 – such as NHS consultants and lawyers – who have been retiring early once reaching the limit for their pension savings.
The reason the abolition may not be quite as advantageous as suggested is because of what has not changed:
Be warned that when it comes to long-term pension planning, this is an area of tax which sees change every few years. An election is less than two years away, and the Labour party has said they will reinstate the lifetime allowance.
The annual allowance has been increased from £40,000 to £60,000. Pension contributions are often only made to eliminate higher or additional rate tax liabilities, and covering the 60% charge when the personal allowance is tapered away is particularly beneficial.
The uplift will help any self-employed people who can see wide fluctuations in income from one year to the next.
For example, a self-employed person with anticipated profits of £150,000 for 2023/24 will now be able to make a pension contribution of £50,000, with £25,140 of this benefiting from 60% tax relief, and the remainder at 45%.
However, the problem – as always – is forecasting profits before the pension contribution deadline of 5 April.
The money purchase annual allowance has been increased from £4,000 to £10,000. This increase could benefit those who have taken funds out of their pension pot to help pay for the rising cost of living. Previously, they would have only been able to rebuild their pension savings by investing a maximum of £4,000 annually but can now save £10,000 if they can afford to do so.
Anyone who has had to dip into their pension savings will be also pleased that it looks as if the plan to bring forward a rise to the State pension age to 68 has been postponed for now.