Managing the New Pension Allowance Landscape

Your retirement planning options could need review after the Budget changes to the lifetime allowance and the annual allowance.

When the current pension tax regime was introduced 17 years ago, it had two new constraints:
 
 

• The lifetime allowance set the effective maximum tax efficient value of your retirement benefits. It started at £1.5 million, which today would be about £2.44 million. 
• The annual allowance set your maximum tax-relievable contribution from all sources across a single tax year. It began at £215,000 in 2006/07. 

 

As the Treasury grew concerned about tax relief costs, it began a whittling down process that meant by 2022/23 the lifetime allowance was £1,073,100 and the annual allowance £40,000 (at best). As a result, some higher earners found that pension contributions had become tax inefficient. 

The March 2023 Budget made two important announcements on the allowances: 

• The lifetime allowance will disappear completely from 2024/25, while in 2023/24 it will generally not apply to retirement benefits. 
• The maximum annual allowance was increased from £40,000 to £60,000 from 2023/24.

 

These changes mean that you now have greater scope to plan your retirement using pension arrangements rather than other forms of saving. 

That is particularly the case if you (and your employer) were prevented from making any pension contributions because of either the risk of exceeding the then lifetime allowance, or if you benefitted from one of the various transitional lifetime allowance protections introduced over the years.

 

Planning considerations

Now you or your employer can make a pension contribution without having to consider lifetime allowance constraints. Contributions could cover not only the current tax year, but also any unused annual allowance from the last three tax years – a maximum potential total contribution of £180,000 in 2023/24. 

In practice any resumption of, or increase to, contributions should only happen after a careful review of your personal circumstances and retirement options. For example:

• If you have already taken income flexibly from your pension, your total contributions will be subject to the money purchase annual allowance of £10,000 per tax year (an increase from the previous £4,000).
• Making a large contribution in one tax year may mean you receive less tax relief than you would by spreading the contribution over several tax years. 
• If you are self-employed and subject to the basis year transitional rules in 2023/24, a substantial one-off contribution could help counter the increased income tax bill you may face.
• New rules that place a cash ceiling on the 25% tax-free pension commencement lump sum could mean that all or part of any fresh contributions can only be used to provide taxable pension income. In that instance you may prefer other investment options.

 

Even if you do not want to add to your retirement fund, pension contributions may still make sense from an estate planning viewpoint. Death benefits from pension arrangements are generally free of inheritance tax, and on death before age 75, also income-tax free for the recipients. 

 

Review Your Financial Plan

 

To arrange an appointment, you can contact us via your usual MHA adviser, or directly on 01604 621 421 or enquiries@mhacaves.co.uk

 

Important Information/Risk Warnings

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. 

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate will writing and some forms of estate planning.

Occupational pension schemes are regulated by The Pensions Regulator.

MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715. 

This is a marketing communication, for general information only, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Caves Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk. Therefore, you are recommended to seek professional regulated advice before taking any action. 

Key Risks: Capital at risk. Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested.

Investment markets and conditions can change rapidly. Investments should always be considered long term. 

This Information represents our understanding of current law and HM Revenue & Customs practice as at June 2023. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. 

Tax and Estate Planning Services (including Trusts) are not regulated by the Financial Conduct Authority.