How will the Spring Budget's pension changes affect me?
The Spring Budget took place on the 15th March, where Jeremy Hunt made many announcements. A key announcement we are looking at in more depth today is pensions. The main reason in which changes were made to pensions is to support the government’s efforts in encouraging older individuals (specifically those that are aged 50+) not to take early retirement but remain working or go back to work if they have in fact already taken retirement, to save more for the future. The changes announced by Jeremy hunt do give you the opportunity to save more and provide a helpful tax planning opportunity, therefore you should make the most of the new changes. The 4 key changes regarding pension are the increase to the annual allowance, the money purchase allowance, the tapered annual allowance and the lifetime allowance. All of which we are going to discuss in more detail below.
Annual allowance:The Annual Allowance is the maximum of tax free growth that an individual’s pension can grow by in one year, without incurring additional tax charges. Currently the limit is £40,000 per year and it has been for some time now. However, from the 6th April 2023 this will be increasing by 50% to £60,000 per year. The income level for the tapered Annual Allowance will increase from £240,000 to £260,000. It is important to remember that the annual allowance covers all your private pensions combined. For example, if you have two private pensions the allowance will be split, so it would be £20,000 for each.
Money Purchase annual allowances (MPAA):The Money Purchase Annual Allowance is a restriction to the amount you can pay into your pension fund and still receive tax relief. MPAA replaces your annual allowance, and therefore will kick in the first time you access your pension pot. Prior to the 6th April 2023 the MPAA was £4000, and from the 6Th April 2023 it will be more than doubling to £10,000.
Tapered annual allowance:There are further limitations to tax relief that higher earners can claim on their pension savings. It will gradually decrease the amount that an individual can contribute to their pension each year. The decision has been made that the income level will be increased from £240,000 to £260,000.
Lifetime allowance:
The lifetime allowance is the maximum amount of pension savings that you can build up in all of your pension savings, without incurring a tax charge. If you do go over the allowance you will have to pay a tax charge on the excess at certain times. The decision was announced at the Spring Budget that the Lifetime allowance charged will be removed, meaning that nobody will have to face a Lifetime Allowance charge. It will be formally abolished in a later Finance Act. However it is important to note that the LTA will still exist purely for the purpose of capping the 25% tax-free lump sum that is available when you first access a pension. For most people, this ‘Pension Commencement Lump Sum’ is set at £268,275, and amounts drawn above this will be taxed at your marginal rate.
Here at Oldfield, we have done a lot with clients with utilising their self-managed pension funds for investing in commercial property, and this announcement will assist with this greatly, and scope for further opportunities.
Tax affairs are complicated and we would always advise you to speak with your advisers before making any changes. For more information on how we can help you and your business please contact us at info@oldfieldadvisory.com or call 02476673160.
Please note: This article is provided for information only and was correct as at time of writing (31/03/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.
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