The government has removed the limit they had on the amount of money you can save in your pension over your lifetime. This was called the Lifetime Allowance (LTA); exceeding it meant paying a tax charge.
This has opened up different opportunities for different clients.
Should I restart contributions?
If you have stopped contributing to your pension to avoid breaching the LTA, you may want to consider starting again. Pensions are a good way to save money because any money invested in them can grow tax-free. If you’re under 75, your contributions get tax relief from the government based on your income tax rate. If you have a workplace pension, your employer may also contribute to it. Making pension contributions can also lower the amount of money you need to pay tax on. This means that you may be able to bring yourself down to a lower tax band.
For example, if you earn £130,000 a year and contribute £13,000 to a pension in the 2023-24 tax year, you will receive pension tax relief of £5,239.50. This will reduce your taxable salary to £112,930, which will keep you below the new 45% tax threshold of £125,140.
Lowering your taxable salary may also help you to keep your personal allowance for income tax and remain eligible for benefits such as free childcare and child benefit. Additionally, pensions don’t count towards your estate for inheritance tax purposes, so they can be a good way to pass money on to your loved ones.
However, there may still be other restrictions that prevent you from contributing to your pension or limit the amount you can contribute, even if the LTA and charges for breaching it are abolished. It is always worth getting financial advice when looking at this.
What about tax-free cash?
When you retire, you can take out up to 25% of your pension as a tax-free lump sum. The Government has kept the limit on this at its current level of £268,275. If you have taken out one of the various LTA protections offered when the LTA was reduced in the past, you may be able to take out more tax-free cash. For example, if you had a protected LTA of £1.5 million, you would still be able to take out 25% of that figure tax-free, which is £375,000.
If you took out this protection before 15 March 2023, you could restart your pension contributions after April 6 without losing your entitlement to a higher level of tax-free cash.
Will all this be reversed?
The removal of the LTA is not yet confirmed and will depend on the passing of a finance bill in 2024. The Labour party have stated that they will reinstate it, except for doctors, if they win the next election. Therefore, it is possible that the limits could be reinstated not long after their abolition.
If the LTA is reinstated, it may be possible to protect what has already been built up at that point. As such, those wishing to build up their pension to fund their retirement may wish to take the opportunity to do so over the next year or two. However, it might be wise to wait until the full details of the LTA abolition are confirmed in the 2024 Finance Bill.
Those considering withdrawing pension funds before the next election should exercise caution. Withdrawing pension funds prematurely could also mean that money is no longer in a tax-efficient environment.
If you have any questions, it’s always a good idea to talk to a financial advisor. If you’d like to discuss your pension planning, book a free, no-obligation chat here