Pension changes: what’s changed and how you could benefit

The changes to the pension rules announced in the March Budget offer significant tax planning opportunities particularly relevant to higher earners and people approaching retirement or who have already retired and have income from various sources. We thought it would be helpful to summarise the main changes and explain how you may be able to take advantage of them.

The main changes at a glance:

• The limit on how much you can hold in a pension without triggering an additional tax charge has been removed – as of 6 April 2023 the rate at which any excess is taxed is 0% and the Finance Bill abolishes the lifetime allowance totally as of 6 April 2024.
• The amount that can be paid in each year has increased to £60,000 if you haven’t taken taxable money from your pension and to £10,000 if you have or if your income is above £260,000.
• The amount you can take out of your pension as tax-free cash remains 25% up to a maximum of £268,275.
• However, if you have existing lifetime allowance protection already in place, you can take up to £375,000 or £312,000 tax-free cash, depending on which protection you have.
• The age at which you can start accessing your pension will go up to 57 as of 6 April 2028.

What hasn’t changed:

• You only pay in up to 100% of your relevant UK earnings in personal contributions in any given tax year or up to £3,600 if you do not have any earned income.
• The rules surrounding pensions and inheritance tax are unchanged.

While the changes aim to encourage older, higher-paid workers, such as NHS staff, to keep working, in practice they open planning opportunities for people of all ages and income levels. Here are a few of them:

• Pay in more: pensions remain a very tax-efficient way of saving: there is tax relief on contributions and no capital gains tax to pay on any growth.
• Use the carry-forward rule: if nothing was paid into your pension last year you can catch up on three years of unused annual allowances plus this year’s allowance. This means you could pay in up to £180,000, whether through personal or employer contributions, with both parties getting tax relief in the usual way.
• Remove money from your business tax-free: contributions made by employers can be offset against corporation tax. For example, a director taking £9,100 a year in salary and with no other relevant UK earnings can pay in £7,280. The government adds £1,820, giving a total of £9,100. Their employer can pay in up to the balance of the individual’s annual allowance. When combined with the carry-forward rule, a director can move a considerable amount of money from their business to their personal savings tax-free.
• Review when you plan to access your pension: depending on your age and circumstances it might make sense to access your pension before 6 April 2028 when the age at which you can access it rises from 55 to 57.
• Act while you can: Labour has pledged to reinstate the old lifetime allowance if it gets elected. It could make sense to pay as much into your pension as you can this tax year. You would then have the option of taking out your tax-free lump sum just before the election in case Labour wins and makes changes. However, political parties have been known to renege on election pledges and opinion polls have been known to be wrong.

Whether you can and should take advantage of any of the changes will depend on you and your family’s financial circumstances and goals. To find out more please get in touch with your usual MKC independent financial adviser.

30 June 2023

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The material in this article is for information only. The article is for UK residents only. It is the property of MKC Wealth Limited and should not be distributed without prior permission from this business. The information contained in this article is based on our interpretation of  HMRC legislation which is subject to change. The value of your investments and the income from them may go down as well as up and neither is guaranteed. Changes in exchange rates may have an adverse effect on the value of an investment. Changes in interest rates may also impact the value of fixed income investments. The value of your investment may be impacted if the issuers of underlying fixed income holdings default, or market perceptions of their credit risk change. There are additional risks associated with investments in emerging or developing markets. Investors could get back less capital than they invested. Past performance is not a reliable indicator of future results. MKC Wealth Ltd does not provide taxation advice. Taxation advice is not regulated by the Financial Conduct Authority.