Pensions got a bit of a shake-up in Jeremy Hunt’s latest Budget with major changes made to how pension savings work.
During his recent Spring Statement, the Chancellor increased pension tax-free allowances and abolished the lifetime allowance.
The Government’s changes form part of its plans to get more people into work, including early retirees. It also hopes that the move will keep higher earners in qualified professions, such as NHS GPs and surgeons, in work for longer.
Here is a rundown of the changes introduced by the Chancellor and what they could mean for you.
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Mr Hunt said: “I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most. The NHS is our biggest employer, and we will shortly publish the long-term workforce plan I promised in the Autumn Statement.
“But ahead of that, I do not want any doctor to retire early because of the way pension taxes work."
What were the key changes to pensions in the budget?
The pension annual allowance will increase from £40,000 to £60,000
The money purchase annual allowance will increase from £4,000 to £10,000
The lifetime allowance will be removed entirely
How have pension allowances changed?
The pension allowance is the total amount that you are permitted to add to your pension pot before you have to pay additional taxes. This includes payments from you, your employees and any other third parties.
Initially, the allowances were equal to either £40,000 or your total earnings, whichever is lower. However, the changes introduced by Jeremy Hunt mean that allowance will be increased to £60,000 from the beginning of the April 2023 tax year.
How have money purchase annual allowances changed?
If you start to take money from your pension pot, the amount that can be contributed to your defined contribution pensions while still getting tax relief on might reduce. Prior to the changes, the amount you can pay into your pension after taking money out was £4,000 per year.
However, Mr Hunt has changed that allowance and raised it so that £4,000 raises to £10,000. This will make it easier for people to keep working and saving once they’ve taken money from their savings. This might be particularly useful for anyone who dipped into their pension plan to help top up their income during the pandemic or while costs are so high.
What are the lifetime allowance changes?
The lifetime allowance is the total amount a person can build up in all their pension savings throughout their lifetime without facing a tax charge when they come to take them. If their pension savings are worth more, they would need to pay a charge on anything over the allowance.
The lifetime allowance is currently £1,073,100 and in the 2021 Spring Budget, the Chancellor announced that it would stay until 2026. However, Jeremy Hunt has undone that and agreed to abolish the lifetime allowance altogether.
The changes will affect those who pay more than £40,000 into their pension annually or have saved more than £1.7m in their lifetime.
Only 8,000 people across the UK have saved more than £1m in their lifetime. Just 1% of workers save more than £40,000 per year, according to Government figures.
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