Significant changes that will affect retirement savings
Chancellor Jeremy Hunt’s first proper Budget 2023, on Wednesday 15 March, brought some welcome but unexpected changes to pension tax. The changes are designed to alleviate the impact of strict pension rules, which are believed by Mr Hunt to have had a negative impact on the country’s labour market.
Britons can now expect significant changes that will affect their retirement savings. But to fully understand how these changes could impact on your pension and secure your retirement plans, it is essential to obtain professional financial advice.
Exceeding the allowance
The most significant change was the abolition of the pension Lifetime Allowance (LTA) charge. As of 6 April 2023, the LTA for registered pension schemes has been completely removed, with total abolition set for April 2024. The LTA was previously the maximum amount of savings an individual could make in a registered pension scheme without incurring a tax penalty.
The standard LTA for the 2022/23 tax year was set at £1,073,100, which meant those with pensions exceeding this amount would face a tax charge. However, with the abolition of the LTA, individuals can now contribute as much as they like to their pension schemes without fear of being penalised for exceeding the allowance.
Tax-free lump sum
This is particularly good news for those with pensions of significant value, as they will no longer be forced to limit their contributions to avoid a tax charge. If you paused pension contributions because you were concerned you might breach the LTA, you may decide you want to make further tax-efficient additions to your pot. It is also worth noting that the government tax relief on pension contributions will still be available, which means individuals can continue to benefit from this incentive.
Additionally, under the previous LTA rules, an individual could withdraw up to 25% of their pension savings as a tax-free lump sum, but that has now changed. The tax-free lump sum that can be drawn at age 55 is now capped at £268,275, and it is expected that another cap will be set in 2024 once the LTA is fully abolished.
UK’s pension system
This means that those who have saved a large amount in their pension may not be able to withdraw as much as they had planned. To ensure that your retirement plans are not affected by these changes, it is essential to obtain professional financial advice and discuss what is the best course of action for your situation.
The removal of the LTA marks a significant change to the UK’s pension system, and it remains to be seen how this will impact pension savings and retirement planning in the years to come.
Attractive investment option
The tax-relievable annual pension contribution limit has also increased from £40,000 to £60,000, which is good news for most people.
Pensions have always been an attractive investment option with tax-relievable contributions, tax-free returns, and no Inheritance Tax. The removal of the LTA tax regime and the opportunity to rebuild pension benefits with an increased allowance are excellent news for long-term financial wellbeing.