May 10, 2023

Seasons of change

With the seasons changing we can at last start to enjoy lighter evenings, warmer temperatures (hopefully?) and look forward to the summer months ahead.

But while it may not be quite as exciting, it’s also an important time in the financial calendar which does provide some worthwhile planning opportunities.

This is the first in a series that will look at the changes introduced in the Spring Statement by the chancellor Jeremy Hunt and how they might impact you as you look to the year ahead.

In this article, we’ll focus on the sweeping changes that have been made to pensions and explain what they all mean.

Lifetime Allowance

What is it?

Your Lifetime Allowance refers to the total amount of money you can accumulate across all of your pensions before you need to pay a Lifetime Allowance charge. It applies to all personal and workplace pensions (but not your State pension or any overseas pensions).

What has changed?

The LTA was previously set at £1,073,100. Although this did not limit how much could be accumulated into pensions, checks would be carried out in response to certain events and at specific points in time, to measure the total value of an individual’s pensions against the LTA. Where the value of the pension benefits exceeded the LTA, a lifetime allowance tax charge would apply to the excess. Income tax would also apply on any additional income received by the pension holder.

There was much anticipation that the Lifetime Allowance was going to be increased in the Spring Statement, but it has actually been removed with effect from the 6th of April 2023.

However, the amount that you can elect to take as a tax-free lump sum – generally, but not always, 25% of the total pension fund value – is to be capped at £268,275 (i.e. 25% of what was previously the LTA at £1,073,100) with no planned increases in the future.

What this means for you

One of the main reasons this change was introduced was to encourage over 50s (for example doctors) to return to work, but it will also give greater incentive to some to save more into pensions without fear of incurring a tax charge in the future.

With inflation making the cost of living more and more expensive coupled with people living for longer, saving more to pensions might help ease concerns about “having enough”, or maybe even retiring earlier than intended. Freedom to make the most of those summer months in the years ahead.

Those who are under 75 and might have stopped contributing to pensions because of being close to, or over the LTA, now have the opportunity to consider making further payments. (Just remember to check if you have any historical, fixed protection for your pensions against previous reductions in the LTA. If you are at all unsure, just ask your adviser.)

Any surplus personal pension funds not used during retirement can, if organised correctly, by-pass any inheritance tax calculation on death and instead pass directly to your intended beneficiaries. In this way pensions can be considered as inter-generational which might motivate some to look again at pension contributions.

Annual allowance

What is it?

The limit on how much money you can contribute to your pension in any one tax year while still benefiting from tax relief. It’s not the maximum pension contributions you can make. You could still make more. But you wouldn’t get tax relief on contributions over the annual allowance.

It is important to remember that this includes contributions you make, as well as those from your employer and/or third parties and that tax relief will only be granted on total contributions up to 100% of your earnings within the same tax year.

The Money Purchase Annual Allowance (MPAA) is a special restriction on the amount you can pay in to your pension and still receive tax relief.

The MPAA is triggered when you withdraw income from a personal pension scheme, not including any tax-free lump sums you are entitled to.

Finally, the Tapered Annual Allowance (TAA) is another restriction triggered for those earning over a certain threshold within a tax year, reducing the annual allowance by £1 for every £2 of income over the set limit.

What has changed?

The annual allowance has now increased from £40,000 to £60,000.

What this means for you

Having remained at £40,000 since the 2014/15 tax year, this increase is a welcome chance for you to potentially increase your annual pension contributions (assuming earnings justify the contribution of course).

An example of who might benefit from this change is directors of their own limited company. Remember, you can make pension contributions through your business as an employer payment, with two key benefits. Firstly, as the payment is regarded as an expense, the company will receive corporation tax relief on the contribution amount made in the corresponding tax year. Secondly, you will be moving funds out of your company and into your name tax-efficiently. Not something that is easily done these days!

Money Purchase Annual Allowance (MPPA) and Tapered Annual Allowance (TAA)

What is it?

Too many acronyms?! Sorry, but they are a lot snappier than the official titles!

The MPAA is a reduced Annual Allowance for contributions into defined contribution pensions (e.g. personal pensions, but not defined benefit or “final salary” pensions).

It is triggered when the pension fund is accessed flexibly to draw-down taxable income out-with the tax free cash.

The TAA (are you still with us?) is a reduced Annual Allowance for those whose “adjusted income” is above £260,000 per year.

The annual allowance is reduced by £1 for every £2 in excess of the £260,000.

However, there is a minimum annual limit below which an Annual Allowance cannot be tapered

What has changed?

Both the MPAA and TAA have been increased from £4,000 to £10,000 per annum each – with effect from this tax year.

What this means for you

If, whilst continuing to work, you have accessed your defined contribution pension flexibly either for personal expenditure or perhaps to help a family member, this change might allow you to put more into your pension – perhaps to make-up for the original withdrawal made, to help you stop work earlier than expected or to help provide for your intended beneficiaries.

For those earning more than £260,000, you can contribute more into your pension which will attract tax relief at a rate of up to 45% – which is very appealing.

Making the most of these opportunities

The Spring Statement presents various ways to save more money and increase your tax efficiency. But time is of the essence.

Exactly how these opportunities can be utilised will depend on your particular situation. We’re of course perfectly positioned to help you make the most of them. The easiest way to get the ball rolling is to have a chat with us.

And finally … meet Ross!

We leave you with one final piece of good news.

Many of you may already have met Ross at your planning meeting.

He is our most recent addition to the financial planning team and we are very proud to announce that he will be running the Edinburgh Marathon on the 28th of May to raise money for Alzheimer Scotland, who do truly amazing work to support people affected by dementia.

You can find out more about Ross’s fundraising campaign here.

May 10, 2023