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The Spring Budget: What Does it Mean For Your Pension?

By March 22, 2023No Comments

The Budget has introduced a raft of measures meaning positive changes to pension allowances.

The changes give you extra scope and flexibility to pay more into your pension for longer, so it’s good news if you’re not ready to retire just yet and want to make sure you’re well set up for the future.

Let’s take a closer look at what was announced…

Tax-free pension limits raised

From April 6th, the pensions annual tax-free allowance will be raised by half – increasing from £40,000 to £60,000. Although this sounds like a lot and many savers will not reach this limit, it can be helpful for those looking to pay in extra to their pension to make up for any lost years where they haven’t been able to save.

Lifetime allowance charge to be scrapped

The Lifetime Allowance – the maximum amount you can draw from pensions in your lifetime without paying extra tax – currently stands at £1.07m, so if you go over this allowance, you will pay a tax charge when you access the money in excess of this limit. In a significant move, the government is scrapping the charge in April 2023, and then abolishing the allowance completely next year, so long as the legislation is passed. Although it might sound like a big number, saving regularly into a pension for many years can mean you end up with a large pension pot, especially when you add employer contributions on top. This should simplify the pension tax system for many people. 

Changes to the Tapered Annual Allowance

The Tapered Annual Allowance currently applies to people whose “threshold income” is above £200,000 and their “adjusted income” is over £240,000, thus limiting the amount of tax relief you can get on your pension savings if you’re a high earner. But following the Budget, anyone in this category will benefit from the minimum Tapered Annual Allowance being raised from £4,000 to £10,000, and the adjusted income threshold for the Tapered Annual Allowance increasing from £240,000 to £260,000.

Money Purchase Annual Allowance to increase

If you want to access money from a defined contribution pension pot, which includes your Creative Pension Trust account, the total tax-relieved pension savings you can make each year after you draw from your pension, is then limited. This is known as the Money Purchase Annual Allowance (MPAA). The government is increasing the MPAA to £10,000 from April 2023. This means that if you need to access your pension savings to top up your income, but still want to save into your pension, you now have greater flexibility.

(It’s worth noting there are some circumstances when you can access pension pots withouth being limited to the Money Purchase Annual Allowance. This normally applies to small pots of £10,000 and under.)

Pension Commencement Lump Sum frozen

When you access your pension, one-quarter can be accessed free of income tax. This is known as the Pension Commencement Lump Sum (PCLS), or tax-free cash. Following the Budget, the maximum PCLS for most people will remain at £268,275 and then be frozen. So, although the Lifetime Allowance is set to be abolished, the tax-free cash amount you can access won’t increase in line with it.

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