A Significant Overhaul for Pensions and Retirement Saving
Following the Chancellor’s Budget announcements, pensions got a significant overhaul to make retirement saving more appealing. This comes with an increase in the amount you can put into your pension each year and the effective removal of the limit your pension can reach before you face serious penalties (As much as 55%).
Allowance Increases
The Annual Allowance is the amount you can put into your pension each year and receive tax relief. You will only receive tax relief if you’ve paid enough tax for that year to warrant it, as the taxman will not give more than what you have paid in relief. As of April 2023, the Annual Allowance amount will increase from £40,000 to £60,000.
The Money Purchase Annual Allowance is the amount you can pay into a money purchase pension each year once you have vested part of it. As of April 2023 for the 2023/24 tax year, the Money Purchase Annual Allowance will increase from £4000 to £10,000 – Reverting back to it’s previous amount.
The Tapered Annual Allowance limits the amount of tax relief high earners can claim on their pension savings. As of April 2023 for the 2023/24 tax year, the Tapered Annual Allowance will increase from £4000 to £10,000 – Reverting back to it’s previous amount.
The “adjusted income” amount will also increase from £240,000 to £260,000 for the same tax year.
Lifetime Allowance Removal
The Lifetime Allowance limited the amount a pension could grow (up to £1,0731,000) before penalty charges of up to 55% were applied on the additional amounts, unless the pension holder had a “protected pension”. From the 6th of April, penalties for breaching the limit will no longer apply, rendering the Lifetime Allowance irrelevant.
However the allowance isn’t completely gone, as it would take a separate legislation to remove the it completely.
Taking from you pension limit
As a result of the removal of penalties for breaching the Lifetime Allowance, there is a cap on the amount that someone can take from their pension as a 25% tax-free lump sum.
As of the 6th of April, individuals will only be able to take a maximum of £268,275 tax-free from their pension, which is the same as the maximum they could take under the Lifetime Allowance.
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