Spring Budget 2023: Pension savings changes to boost the economy

From 6 April 2023, the pension lifetime allowance is to be abolished altogether, and the maximum annual contribution levels are also to be increased.

The changes were introduced under the Chancellor’s ‘Employment’ pillar, to encourage growth in the economy. The objective of relaxing these rules is to remove barriers to those over 50 returning, or continuing to work, who may have otherwise been penalised. As the Chancellor admitted himself, it is NHS clinicians in particular he is looking to incentivise, however, the new rules will be available for all.

Previously, pension benefits held by individuals that were valued in excess of the lifetime allowance, would have faced an additional tax charge of up to 55% on that excess. This would have been at age of 75, or an earlier death. The current lifetime allowance stands at £1,073,100. This means the tax charge will now no longer apply from 6 April 2023.

This is a welcome announcement for many currently planning their retirement but will also be a useful tool for individuals who are looking to mitigate the impact of tax on their estate on death. This is because pensions are generally not included in an individual’s estate for inheritance tax calculation purposes. As a result, those who die before age 75 can effectively pass on their pensions tax free. The message, therefore, has to be that when it comes to estate planning the first action should be to put what you can into your pension.

One point to note, however, is that although the removal of the lifetime allowance tax charge will be seen as a positive; the level of tax-free cash that an individual can withdraw from their pensions will still be capped under the existing limits.

In terms of maximum contributions, the Annual Allowance is the amount that individuals with sufficient earnings can contribute to their pensions each year without facing tax charges on them. This has been increased by 50%, from £40,000 to £60,000.

There are restrictions to this limit for some. High earners have until now had their Annual Allowance reduced potentially down as far as £4,000. However, the announcements have increased the minimum permitted contribution level to £10,000. The amount of taxable income (and employer pension contributions) that an individual can receive has also increased from £240,000 to £260,000 before the tapering of the Allowance starts to apply.

The Money Purchase Annual Allowance (MPAA) is a limit on pension contributions affecting those who have already drawn taxable income from a flexible pension arrangement. This has been increased by 150% from £4,000 to £10,000.

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These changes will no doubt lead to confusion for some, so if you feel that your pension planning could benefit from a review, but are unsure where to start, please contact me or a member of our financial planning team.