If Jeremy Hunt did produce a ‘rabbit-out-the-hat’ in his Spring Budget, it was the announcement of the effective abolition of the pensions lifetime allowance (LTA) from 2023/24. Since 2006, the LTA has been a cornerstone of the retirement tax rules, effectively setting a ceiling on the tax-efficient value of all your pension benefits.
An LTA of £1,073,100 in its pre-Budget form, would be encountered by most people, with the figure set to freeze until April 2026. That may sound more than enough, but a 65-year-old non-smoker using that sum for an inflation-proofed annuity would only generate an income of about £45,000 a year (before tax).
In his speech, Mr. Hunt made clear that one of the main aims of the abolition was to discourage doctors from retiring early to avoid a pension tax charge. However, the beneficiaries of the change will stretch far beyond the medical profession. The LTA was £1.8 million in 2011/12, but since then has been frequently cut or frozen. Consequently, an increasing number of higher earners have reduced or stopped pension contributions for fear that they too would face a tax charge (at up to 55%) when they drew their benefits.
Additional pension measures
There were three other pension measures in the Budget:
- The government increased the annual allowance, which imposes a limit on tax-efficient total contributions in a tax year, to £60,000. However, taper rules still apply to the highest earners.
- They raised the money purchase annual allowance from a restrictive £4,000 to a more flexible £10,000, applicable to those who have withdrawn retirement income.
- Unless covered by some form of LTA protection, a new cash limit of £268,275 will be imposed on the tax-free pension commencement lump sum.
Mr. Hunt’s reforms create an opportunity to enhance your retirement fund, especially if you were one of the individuals compelled to suspend pension contributions in the past. In those circumstances, you may be able to contribute up to £180,000 in 2023/24. However, before taking any action, advice is essential – not all pension tax traps have disappeared.
How can we help you?
You should always seek advice from an independent financial adviser about your pension and pension contributions. If you need guidance regarding your tax allowances and the tax implications of withdrawing your pension, then please contact us on 01444 716946 or on 01273 963656 or alternatively email us here.