During the Spring Budget last month, Chancellor Jeremy Hunt announced that various pension allowances would be relaxed in order to incentivise those nearing retirement age to remain in work (or return to work if they took early retirement).
These changes are already in place – they came into effect at the beginning of this month on 6th April – so in this blog post we’re taking a look at what the new allowances are and what they mean for you going forward.
Pension annual allowance
As the name suggests, the pension annual allowance is the maximum amount of contributions that you and your employer (and any third party) can make to your pension pot in one tax year without being taxed. This was previously set at £40,000 a year – and had been for the last nine years.
Unfortunately, those who have a final salary pension can often be caught out by this, due to the fact that the allowance is calculated from the fund’s growth using a rather complicated method, rather than the amount an individual pays in.
The good news is that the annual allowance has now increased to £60,000. And if you have any unused annual allowance, you’ll still be able to carry this forward for three tax years. Please note that if you earn less than £60,000, your allowance will be capped at your total earnings instead.
Money purchase annual allowance
If, for whatever reason, you decide to draw taxable money out of your pension pot, it’s likely that you’ll trigger the money purchase annual allowance, which – under the previous rules – meant that your annual allowance would reduce from £40,000 to just £4,000.
The money purchase annual allowance cap has now been restored to £10,000 a year: the rate it was previously up until 2016–17. Unfortunately, you’re still unable to carry forward any unused allowance into later tax years.
Tapered annual allowance
If you’re classed as a high earner (formerly classed as someone who had a threshold income of over £200,000 and an adjusted income of over £240,000) you’ll qualify for the tapered annual allowance. Triggering this allowance would mean that your annual allowance would be tapered by £1 for every £2 of income you have that’s over the higher figure – down to a minimum of £4,000.
However, there have been two changes to the tapered annual allowance: the adjusted income has increased to £260,000 and the lowest that the tapered allowance can now reach is £10,000.
The lifetime allowance is the total amount that an individual can accumulate in their pension pot without paying additional tax when they come to access it. The allowance was previously set at £1,073,100, which meant that anything over this would be taxed at 25% when drawn as a regular pension or 55% if drawn as a lump sum.
As of 6th April, the lifetime allowance no longer applies, meaning that individuals will now have a better opportunity to build up unlimited pension funds. However, with this comes some disadvantages. If you wish to take a tax-free lump sum from your pension pot once you reach the minimum pension age, you’ll only be able to withdraw a maximum of £268,275. This means that you won’t be able to avoid tax on a full quarter of your total fund if it exceeds £1,073,100.
It’s also worth remaining cautious about the removal of the lifetime allowance as this could be overturned in the future. For example, the Labour Party plans to reinstate it if they come to power after the next General Election, so those whom this could affect may wish to keep this in mind and plan for such an event.
For more information about the pension changes outlined in the Spring Budget, please visit the government’s policy paper. If you’d like advice regarding how your pension will be affected by these changes and what you can do to ensure your pension pot remains as tax efficient as possible, take a look at our pension planning services. We’ll help you take control of your pension planning and ensure you have the best opportunities for your retirement.