In his Budget speech, Chancellor Jeremy Hunt announced an overhaul to pension tax rules as part of efforts to encourage over-50s to remain in or return to work.
Under existing rules, savers can accumulate up to £1.073m over their lifetime before tax charges kick in, but this cap – known as the lifetime allowance – is to be abolished.
Meanwhile, the maximum you can save into a pension in a single year while still benefiting from tax relief (known as the 'annual allowance') will be increased from £40,000 to £60,000 from April 2023.
Previous cuts to these allowances had been blamed for higher earners – in particular senior NHS doctors – retiring early to avoid large tax bills.
Find out more:What is the pension lifetime allowance?
Under current rules, you can save as much as you want in your pensions, but if your pots exceed a certain amount, you could be hit with a hefty tax bill – as much as 55%.
This limit is known as the lifetime allowance. It has stood at £1.073m since 2021, and was due to be frozen at that level until 2026, but in his Spring Budget the Chancellor announced that it will be abolished.
What is the pension annual allowance?
The annual allowance is the limit on the amount you can save into private pensions in a single tax year while benefiting from tax relief.
Unlike the lifetime allowance, this will remain in place, but the Chancellor has announced that it will increase by 50% – from £40,000 to £60,000 – as of April 2023.
Any amount above the annual allowance will incur a tax bill equivalent to the tax relief you initially received on it.
You can carry forward any unused annual allowance from the past three tax years.
If you have a particularly high income, your annual allowance could be reduced. Under the new rules it will taper down to a minimum of £10,000 (previously this minimum was £4,000).
What is the money purchase annual allowance?
Known as the 'money purchase annual allowance' (MPAA), this cap is designed to stop people who have already dipped into their pension from recycling this cash and benefiting from double tax relief. If you exceed the MPAA – which currently stands at £4,000 – you could end up with a tax charge.
Triggering the MPAA also stops you from being able to carry forward any of your unused annual allowance from the three previous tax years, which you'd usually be allowed to do. You can't carry forward any unused MPAA.
The Chancellor has announced that the MPAA will rise to £10,000 from April 2023 – returning it to the amount it was set at when it was introduced in 2010.
Who will benefit from the Chancellor's pension tax reforms?
The Chancellor is hoping that easing restrictions on the amount you can save in your pension before having to pay a tax charge will encourage older workers – especially those in the NHS – to remain in the workforce.
These limits hadn't kept pace with inflation, meaning that more workers have found themselves being caught out. However, this group remains a minority compared with the UK workforce as a whole.
Meanwhile the increase in the MPAA is designed to remove a barrier to people considering returning to work after retiring. If you've already taken income 'flexibly' from your pension, from April you'll be able to save more (£10,000, up from £4,000) while benefiting from tax relief.
undefinedsource https://www.which.co.uk/news/article/reforms-to-pension-tax-rules-set-to-give-savers-a-boost-aOnUI8V8OkUE