George Square shares an overview of the key pension changes announced in the Spring Budget 2023, several of which came into force on 6 April 2023.
The recent Spring Budget included the announcement of various different schemes and initiatives intended to encourage individuals to return to work and to stay in employment for as long as possible. This includes a number of changes to pension allowances.
What are the changes?
- Pension allowance will increase from £40,000 to £60,000
- Money purchase allowance will increase from £4,000 to £10,000
- Tapered annual allowance will be updated
- Lifetime allowance will be removed
- The maximum PCLS (for those without a protected PCLS) will be frozen at £268,275 – 25% of the current LTA.
The first three of these pension changes came into force at the beginning of the new financial year on 6 April 2023, while the lifetime allowance will be removed on 6 April 2024.
What do these changes mean?
A pension allowance is the total amount that can be paid into your pension each year before an additional tax charge occurs. This was previously either your total annual earnings or £40,000, whichever was lower.
As of the 6 April this has increased to £60,000, meaning you can save a greater amount of money into your pension each year without worrying about any extra tax.
Money purchase allowance
The money purchase annual allowance is triggered when you begin to take taxable money from your pension pot.
Taking this money previously caused the amount that could be saved annually into your account to reduce from £40,000 to £4,000. This has now increased to £10,000, in a bid to make it easier for individuals to continue to work and save after they have dipped into their pension.
Tapered annual allowance
The tapered annual allowance gradually reduces the amount of money that can be saved into your pension plan each year. This allowance previously could not reduce lower than £4,000, however as of 6 April 2023 it has increased to £10,000.
The lifetime allowance is the total amount that can be built up into a pension savings account without a tax charge coming into place when these savings are withdrawn from the account.
The lifetime allowance is currently £1,073,100, but during the Spring Budget it was announced that this lifetime allowance will be removed completely in April 2024. The government hopes this change will encourage individuals to stay in work and add to their pension savings without the worry of additional tax.
Pension commencement lump sums (PCLS)
Individuals may be able to receive to a tax-free lump sum when they become entitled to their pension benefits; this is known as a pension commencement lump sum (PCLS). In most cases, the maximum PCLS that can be taken is the lower of 25% of the value of the individual’s benefits and 25% of the LTA. Some individuals have a higher “protected” PCLS entitlement.
As a result of the LTA change, from 6 April 2023, the maximum PCLS for those without a protected PCLS will be frozen at £268,275 (being 25% of the current LTA).
How will these changes affect you?
These pension changes have been selected to encourage individuals to come out of retirement or to stay in work for longer, therefore they will mostly impact those who are in, or close to, retirement.
The money purchase allowance will likely be a particularly welcome change for many individuals, as it will allow those who may have had to dip into their pension as a result of the cost of living crisis to still be able to build up their pensions in the future.
Ultimately, the changes allow for an increased amount of money to be paid into a pension pot, creating a more comfortable retirement without the worries of additional tax costs.