The Budget 2023 was all about pensions.
Whether you are contributing, withdrawing, have a defined benefit pension or a defined contribution pension there was something for everyone.
What was said in the Budget 2023
After rumours the pension Lifetime Allowance was to be increased from its current level of £1,073,100 to £1,800,000 it was instead completely abolished!
As a reminder the pension Lifetime Allowance is the total amount you can hold in pensions before you face an excess tax charge.
A £1million Lifetime Allowance may sound like a lot but it doesn’t take diligent savers long to accrue this amount over time with an appropriate investment portfolio and possibly a defined benefit pension thrown in.
So abolishing the Lifetime Allowance is definitely welcome and can mean many people can now start contributing to a pension again without fear of extra tax. However as always the devil is in the detail.
The sneaky part of this announcement was the freezing of the pension tax free cash lump sum. Whilst there will be no limit on what you can save into a pension you will be limited in what you can take out tax free.
The limit will remain at 25% of the pension value up to a maximum of £268,275. If you had previously sorted some form of Lifetime Allowance protection then your tax free cash will stay protected.
Freezing the tax free cash element is sneaky because as we know from other frozen allowances, over time these become less valuable as the cost of living increases. More people get dragged into paying taxes. Now the tax free cash element is a fixed figure will future governments start reducing this and eventually phase it out? Who knows?
The details are still to be finalised but it looks like the Lifetime Allowance will still have some implications on death benefits paid out from a pension. Excess death benefits above the current or protected Lifetime Allowance will still likely face some form of taxation.
The amount you can pay into pensions, the Annual Allowance was also increased from £40,000 to £60,000 gross. This will really help those with defined benefit pensions who are still in an active scheme as the way the rules work for these type of pensions, you have no control over your input for Annual Allowance purposes.
It will also be useful for higher earners paying significant Income Tax as any contribution to a pension is going to reduce your tax bill.
The amount you can contribute to a pension after flexibly accessing your pension has also increased from £4,000 to £10,000. This will be useful to those who decide to go back to work after maybe retiring and accessing their pension.
The last announcement regarding pensions was around the Tapered Annual Allowance. This impacts higher earners and limits what they can contribute to a pension below the standard Annual Allowance.
The adjusted income level has been increased from £240,000 to £260,000 and if you are impacted by the Tapered Annual Allowance then the contribution limit has increased from £4,000 to £10,000.
What to do following the Budget 2023
The Labour party have been quick to say they would reverse the scrapping of the Lifetime Allowance if they get into power at the next election.
This is a conundrum as we don’t know what would happen if people start increasing their pension contributions only for the allowance to be bought back in.
We can only plan with the information we know to be accurate. We can’t work on hopes and fears. Like when it comes to investing, these things cannot be predicted and timed. Extra saving is always going to be beneficial regardless of what may or may not come next.
The removal of the Lifetime Allowance and increased Annual Allowance is great for higher rate taxpayers as it can mean more contributions can reduce your overall Income Tax bill now without fear of a one-off tax hit in the future.
It may mean looking again at a potential transfer if you hold a private sector defined benefit pension as you don’t need to worry about any Lifetime Allowance charge once the funds are in a personal pension.
Pensions are also still a great way to protect against Inheritance Tax. The benefits inside a pension are not subject to Inheritance Tax in most scenarios so building as much wealth as you can inside a pension still makes sense.
Pensions should also be even more attractive to business owners as the planned Corporation Tax rise from 19% to 25% is still due to take place.
Now companies will be able to contribute up to £60,000 per year into a pension which is an expense to the business therefore reducing the overall Corporate Tax bill.
Overall this was a very positive Budget for people’s retirement.
A reminder though that the bad news was already communicated back in last year’s Autumn Statement.
The Dividend and Capital Gains Tax allowances will basically be cut in half at the start of the new tax year and half again the following tax year.
So now more than ever you need to ensure you are making use of ISAs and Pensions to shield yourself from the tax grab that is coming.
If you are not sure what to do with your personal and workplace pensions at retirement then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
