Published: 12/10/2023 By Mackenzie StreetKey points
- Lifetime allowance is set to be abolished.
- Maximum tax-free cash a pension member can take is generally capped at £268,275.
- Annual allowance has been increased to £60,000.
- Money purchase annual allowance increased to £10,000.
The lifetime allowance (LTA) was first introduced in April 2006 as part of a “pension simplification” policy. It started at £1,500,000 and fluctuated in value over the years, until it was frozen in 2021 at £1,073,100.
In the Spring Budget 2023, the Chancellor announced that the LTA would be abolished from 6 April 2024. The frozen LTA of £1,073,100 remains for the 2023/24 tax year, but the tax charge applied will be 0%. It is worth noting that Sir Keir Starmer, leader of the Labour Party, has vowed to reverse the abolition of the LTA if his Party come to power in 2024.
Despite the above, if your pension benefits are nearing, or greater than, the LTA you should seek financial advice.
Tax-free cash capped at £268,275
Previously, the maximum tax-free cash a pension member could take was 25% of the value of the benefits being crystallised, subject to the tax-free cash amount not exceeding 25% of the members available LTA.
However, once the LTA is abolished, a pension member could theoretically take 25% of the value of the benefits being crystallised as tax-free cash with no cap. To prevent this, the Chancellor has implemented an immediate change to the tax-free cash rules: the maximum tax-free cash available for most pension members is 25% of the value of the benefits being crystallised, subject to an overall cap of £268,275.
£60,000 annual allowance
The annual allowance is a cap on the amount that can be saved into a registered pension scheme each year and receive tax relief.
Previously, the annual allowance was capped at £40,000 meaning a pension member could contribute up to £32,000 to their pension and receive £8,000 tax relief in any one tax year. However, in the Spring Budget 2023 the Chancellor announced he would raise the annual allowance to £60,000. This now means that pension members can contribute up to £48,000 to their registered pension scheme and receive £12,000 of tax relief in any one tax year.
Pension members can continue to make pension contributions that exceed the annual allowance by capitalising on the carry forward rules: bringing unused annual allowances from the previous three tax years into the current year.
£10,000 money purchase annual allowance
Accessing your pension may trigger the application of the money purchase annual allowance (MPAA) for future pension contributions. It should be noted that the MPAA is only applicable to defined contribution pension schemes.
Previously, the MPAA was £4,000, however, following the Spring Budget 2023, it has now increased to £10,000. This provides greater scope for pension members who have already flexibly accessed their pensions to rebuild their pension funds.
Non-exhaustive list of events that trigger the MPAA:
- Taking an uncrystallised funds pension lump sum (UFPLS).
- Withdrawing an income from a flex-access drawdown fund.
- Purchasing a flexible annuity.
- Notifying your scheme administrator that you want to convert your pension from capped drawdown to flexi-access drawdown, then commencing an income.
This article only provides basic information surrounding the pension changes following the Spring Budget 2023. It does not provide any financial advice. For financial advice, you should contact one of our financial advisors here.
This article is based on our understanding of current UK tax legislation. Levels of taxation will depend upon individual circumstances and may be subject to change in the future.