Welcome but unexpected changes to pension tax
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 lifetime allowance
Subject to being ratified through the legislature, the most significant change was in relation to the pension Lifetime Allowance (LTA) excess charge. Previously, crystallising more than the LTA would trigger an additional tax charge on the excess drawn. Tax would be charged at 55% if you want to take a lump sum with no additional personal tax to pay, or 25% if you drew the excess as income plus your personal tax. As of 6 April 2023, the LTA excess charge tax rates applied have been reduced to zero for all registered pension schemes with total abolition set for April 2024.
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 the excess tax charge. However, with the above changes, 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 the value their pension funds can grow to will no longer be capped. 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, moving to 57 from 2028, is now capped at £268,275 (unless protection is in place).
UK’s pension system
To ensure that your retirement plans are not impacted 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 charge 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, unless tapering applies, which is good news for most people.
Pensions have always been an attractive investment option with tax-relievable contributions, tax-free returns, and in most cases 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.
Burden of Income Tax
While Individual Savings Accounts (ISAs) have remained unchanged, they still are an essential part of a tax-efficient savings and investment strategy. This strategy removes the burden of Income Tax and Capital Gains Tax (CGT). With the current reduction in the CGT allowance to only £6,000, ISAs and pensions become even more critical.
In summary, the Chancellor’s budget was constrained, but the message is clear – it’s time to take advantage of the saving incentives.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.